10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2006

¨ TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21406.

Brookstone, Inc.

(Exact name of registrant as specified in its charter)

Delaware	06-1182895
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One Innovation Way, Merrimack, NH 03054

(address of principal executive offices, zip code)

603-880-9500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At August 10, 2006, the number of shares outstanding of the Registrant’s common stock, par value $.01 per share, was 1.

Brookstone, Inc.

Index to Form 10-Q

		Page No.
Part I:	Financial Information - (unaudited)
Item 1.	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	27
Part II:	Other Information
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		37
Exhibit Index		38

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PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

BROOKSTONE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	Successor					Predecessor
	July 1, 2006			December 31, 2005		July 30, 2005
	(Unaudited)					(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	23,604		$	76,326	$	46,613
Receivables, net		9,663			10,906		7,923
Merchandise inventories		73,776			75,716		75,879
Deferred income taxes, net		16,704			4,947		12,271
Prepaid expenses		9,003			9,117		7,315
Total current assets		132,750			177,012		150,001
Deferred income taxes, net		—			—		5,228
Property, plant and equipment, net		74,631			76,328		74,362
Intangible assets, net		131,813			132,271		—
Goodwill		192,453			192,453		—
Other assets		17,300			19,363		3,213
Total assets	$	548,947		$	597,427	$	232,804
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	12,562		$	22,012	$	12,076
Other current liabilities		41,098			54,714		29,224
Total current liabilities		53,660			76,726		41,300
Other long-term liabilities		19,700			18,962		22,668
Long-term debt		190,551			190,849		8,308
Deferred income taxes		43,430			43,392		—
Commitments and contingencies (Note 6)
Other party interests in consolidated entities		1,296			1,176		1,004
Shareholders’ equity:
Preferred stock-Predecessor, $0.001 par value: Authorized - 2,000,000 shares; none issued		—			—		—
Common Stock – Predecessor, $0.001 par value: Authorized - 50,000,000 shares issued 20,444,825 shares and had 20,436,689 shares outstanding at July 30, 2005		—			—		20
Common stock – Successor, $0.01 par value 1,000 shares Authorized, one share issued and outstanding at July 1, 2006		—			—		—
Additional paid-in capital		245,310			249,145		66,761
Unearned stock compensation		—			—		(1,944	)
Accumulated other comprehensive loss		192			143		(1,257	)
Retained earnings		(5,192	)		17,034		95,991
Treasury stock, at cost – Predecessor 8,136 shares at July 30, 2005					—		(47	)
Total shareholders’ equity		240,310			266,322		159,524
Total liabilities and shareholders’ equity	$	548,947		$	597,427	$	232,804

The accompanying notes are an integral part of these financial statements.

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BROOKSTONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Thirteen-weeks Ended						Twenty-six-weeks Ended
	Successor			Predecessor			Successor			Predecessor
	July 1, 2006			July 30, 2005			July 1, 2006			July 30, 2005
Net sales	$	91,322		$	87,521		$	168,031		$	164,308
Cost of sales		66,410			63,027			127,351			120,653
Gross profit		24,912			24,494			40,680			43,655
Selling, general and administrative expenses		31,120			28,468			61,478			57,480
Loss from continuing operations		(6,208	)		(3,974	)		(20,798	)		(13,825	)
Interest (income) expense, net		6,178			(87	)		11,977			(103	)
Loss before taxes, other party interests in consolidated entities and discontinued operations		(12,386	)		(3,887	)		(32,775	)		(13,722	)
Other party interests in consolidated entities		359			247			646			506
Loss before taxes and discontinued operations		(12,745	)		(4,134	)		(33,421	)		(14,228	)
Income tax benefit		(1,859	)		(1,575	)		(11,513	)		(5,470	)
Loss from before discontinued operations		(10,886	)		(2,559	)		(21,908	)		(8,758	)
Loss on discontinued operations, net of tax benefit of $37, $2,039, $173 and $2,442		(76	)		(3,190	)		(318	)		(3,770	)
Net loss	$	(10,962	)	$	(5,749	)	$	(22,226	)	$	(12,528	)

The accompanying notes are an integral part of these financial statements.

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BROOKSTONE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Twenty-six Weeks Ended
	Successor			Predecessor
	July 1, 2006			July 30, 2005
Cash flows from operating activities:
Net loss	$	(22,226	)	$	(12,528	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		7,083			7,021
Amortization of debt issuance costs		1,090			92
Amortization of revaluation of leases		(102	)		—
Amortization of debt discount		154			—
Stock-based compensation expense		503			786
Other party interests in consolidated entities		646			506
Deferred income taxes, net		(11,757	)		(8,354	)
Related tax benefits on exercise of stock options		—			175
Change in other assets		1,013			(1,472	)
Increase in other long-term liabilities		1,234			308
Impairment charge		—			3,740
Changes in working capital:
Accounts receivable, net		1,243			1,929
Merchandise inventories		1,940			(294	)
Prepaid expenses		114			(1,362	)
Accounts payable		(9,450	)		(5,326	)
Other current liabilities		(16,658	)		(17,276	)
Net cash used for operating activities		(45,173	)		(32,055	)
Cash flows from investing activities:
Expenditures for property and equipment, net		(4,928	)		(7,251	)
Net cash used for investing activities		(4,928	)		(7,251	)
Cash flows from financing activities:
Cash payments related to debt financing		(349	)		—
Payments on long-term debt		(451	)		(452	)
Stock purchase		(1,520	)		—
Capital contributions		225			—
Cash distributions by joint venture partners		(526	)		(593	)
Proceeds from exercise of stock options and employee stock purchase plan		—			759
Net cash used for financing activities		(2,621	)		(286	)
Net decrease in cash and cash equivalents		(52,722	)		(39,592	)
Cash and cash equivalents at beginning of period		76,326			86,205
Cash and cash equivalents at end of period	$	23,604		$	46,613

The accompanying notes are an integral part of these financial statements.

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BROOKSTONE, INC.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of Brookstone, Inc. (‘we”, “us” or the “Company”), these financial statements contain all adjustments (consisting of only normal recurring adjustments, except as specifically disclosed) necessary to present fairly the financial position, the results of operations, and the cash flows for the periods reported. The financial statements contained in this quarterly report include the estimated effects of purchase accounting related to the transaction described in Note 3 below. Certain information and footnote disclosures normally included in annual financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, for purposes of the interim financial statements. It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the annual financial statements and notes thereto which may be found in the Company’s Fiscal 2005 annual report on Form 10-K, as posted on the Company’s website at www.brookstone.com.

In November 2005, the Company changed its fiscal year end from the Saturday nearest the last day in January to the Saturday nearest the last day in December. Results of operations for the second quarter of Fiscal 2006 are for the successor period of April 2, 2006 through July 1, 2006 and the results of operations for the second quarter of Fiscal 2005 are for the predecessor period of May 1, 2005 through July 30, 2005. Our presentations through the fourth quarter of 2006 will compare the new quarter end results with the historical results from the old quarter ends.

We did not recast our interim financial statements for Fiscal 2005 because it was not cost justifiable or practicable to compile such information.

The results of the twenty-six week period ended July 1, 2006 are not necessarily indicative of the results for the full fiscal year. The Company’s business, like the business of retailers in general, is subject to seasonal influences. Historically, the Company’s fourth fiscal quarter, which includes the winter holiday selling season, has produced a disproportionate amount of the Company’s net sales and substantially all of its income from operations. The Company expects that its business will continue to be subject to such seasonal influences.

Certain amounts in the financial statements of the prior period have been reclassified for comparative purposes.

2. Discontinued Operations

On June 29, 2005, the Company announced its decision to sell its Gardeners Eden business and has reclassified those operations as discontinued operations in the consolidated statements of operations in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

3. The Transaction

On April 15, 2005, certain entities formed by OSIM, J.W. Childs Associates, L.P. and certain of its affiliates, or JWC, and Temasek Capital (Private) Limited, or Temasek Capital, collectively, our Sponsors, entered into a merger agreement to acquire the Company and its subsidiaries. The merger agreement was amended as of July 15, 2005 to reduce the aggregate purchase price to approximately $433.3 million and the merger was consummated on October 4, 2005. Concurrently with the consummation of the transactions contemplated by the merger agreement, our Sponsors made an investment in OSIM Brookstone Holdings, L.P., or OBH LP, of approximately $240.0 million in cash, which investment has been evidenced by the issuance of common and preferred equity to OBH LP. In addition, certain members of our management invested approximately $9.1 million in the common equity of OBH LP, consisting of the reinvestment by them of a portion of the merger consideration they received in respect of their Brookstone, Inc. stock options and/or the investment of personal

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funds. In addition, certain members of our management received profit-sharing interests in OBH LP upon the closing of the merger and have been awarded profit-sharing interests in OBH LP under a newly established management equity incentive program. Concurrently with the consummation of the transactions contemplated by the merger agreement, we also entered into a new senior secured credit facility and consummated an unregistered offering of $185.0 million aggregate principal amount of 12.00% second lien senior secured notes due 2012. Upon consummation of the transactions on October 4, 2005, we became an indirect, wholly owned subsidiary of OBH LP.

The acquisition was accounted for under the purchase method of accounting and in accordance with SFAS No. 141, “Business Combinations”. The Company allocated the purchase price to the tangible and identifiable intangible assets and liabilities. Each was recorded at their respective fair values. The excess of cost over the fair value of the identifiable assets and liabilities was recorded to goodwill.

The following summarizes the opening balance sheet of Brookstone, Inc., which includes the preliminary application of purchase adjustments to record the acquisition of assets and liabilities at fair value at the acquisition date. The Company anticipates finalizing these adjustments, primarily liabilities relating to gift certificates by the completion of the Company’s fiscal 2006 third quarter.

	(in thousands)
Total purchase price	$	448,764
Cash and cash equivalents		30,734
Receivables, net		7,383
Merchandise inventories		99,702
Prepaid expense		6,582
Property and equipment, net		73,568
Intangible assets, net		132,500
Other assets		10,535
Total assets acquired	$	361,004
Liabilities:
Current Liabilities:
Accounts payable	$	22,138
Other current liabilities		30,059
Other long term liabilities		17,025
Long term debt		8,090
Deferred income tax, net		26,418
Other party interest in consolidated entities		963
Total liabilities assumed		104,693
Net Assets Acquired		256,311
Excess purchase price over the fair value of net assets acquired	$	192,453

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4. Comprehensive Income (Loss)

Accumulated other comprehensive loss consists of the Company’s unrealized gain on its cash flow hedge related to the Company’s debt. Total comprehensive loss for the thirteen and twenty-six week periods ended July 1, 2006 and July 30, 2005 are presented below (in thousands):

	Thirteen-weeks						Twenty-six weeks
	Successor			Predecessor			Successor			Predecessor
	July 1, 2006			July 30, 2005			July 1, 2006			July 30, 2005
Net loss	$	(10,962	)	$	(5,749	)	$	(22,226	)	$	(12,528	)
Other comprehensive income:
Unrealized gain on cash flow hedge (net of tax of $33, $12, $38 and $28, respectively)		42			20			49			44
Total comprehensive loss	$	(10,920	)	$	(5,729	)	$	(22,177	)	$	(12,484	)

5. Shareholders Equity

In June 2006, the Company entered into a Separation agreement with Mr. Michael F. Anthony former President and Chief Executive Officer of the Company. Under the terms of the agreement, the parent company of Brookstone, Inc., OBH LP exercised its right to repurchase Mr. Anthony’s limited partnership interests in OBH LP for $4.6 million. Payment is in three equal installments with the first in June 2006 and then January 2, 2007 and July 2, 2007. The repurchase will be funded by Brookstone Inc. through a return of capital to its direct parent, Brookstone Holdings Corp., which paid the $1.5 million installment to Mr. Anthony in June. The remaining $3.1 million has been included in “other current liabilities” in the accompanying balance sheet as of July 1, 2006.

Stock-Based Compensation - In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the Company’s consolidated statement of operations. The accounting provisions of SFAS No. 123R are effective for fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 123R effective January 1, 2006 under the “modified prospective” method of adoption whereby earnings for prior periods will not be restated as though stock-based compensation has been expensed, rather than the “modified retrospective” method of adoption, which would entail restatement of previously published earnings.

In November 2005, certain members of the Company’s management received Class B limited partnership interests in OBH LP. These interests are restricted awards that vest either ratably over five years or require certain financial returns be met. Management has determined that these awards should be accounted for under push down accounting and has estimated the fair value of each award on the date of grant using Black-Scholes option-pricing model. During the thirteen and twenty-six week periods ended July 1, 2006 the Company expensed $189 thousand and $503 thousand related to these interests classified in Selling, General and Administrative Expenses. This compensation charge was calculated using the Black-Scholes model with the following assumptions:

	Successor
Expected stock price volatility	53.0	%
Risk-free interest rate	4.2	%
Expected life of options	5 years
Dividend yield	—

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The predecessor company had stock option plans in effect that provided for the issuance of non-qualified and incentive stock options. Stock options were historically granted at or above the market price at the date of the grant. The predecessor company also issued restricted and deferred stock awards under its stock option plans. The value of the restricted and deferred shares in excess of cost was charged to income ratably over the period during which the awards vested. The unearned compensation related to these awards was included as a component of shareholders’ equity.

The following table details the effect on net income if compensation expense for the stock based award had been recorded in Fiscal 2005 based on the fair value method.

	Predecessor
	Thirteen-weeks ended July 30, 2005			Twenty-six weeks ended July 30, 2005
Net loss – as reported	$	(5,749	)	$	(12,528	)
Deduct: Stock-based employee compensation expense determined under fair value based method, net of related tax effects		(288	)		(755	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		169			481
Net loss – pro forma	$	(5,868	)	$	(12,802	)

The above pro forma stock-based compensation was calculated using the Black-Scholes model with assumptions consistent with those used by the Predecessor Company in fiscal year 2005.

6. Contingencies

On September 15, 2004, a putative class action was commenced against us in the California Superior Court in Los Angeles County. The complaint, as amended, alleges, among other things, that we engaged in unfair business practices under California’s Unfair Competition Laws by selling certain air purifiers that failed to perform as intended. On May 4, 2006, the Superior Court issued a decision certifying that the action may be brought on a class-wide basis. On July 21, 2006, we filed a motion to de-certify the class based on a recent appellate decision that was issued. A trial is scheduled for March 5, 2007. We believe this lawsuit is without merit and intend to defend ourselves vigorously.

On June 23, 2005, we were served with a lawsuit in the United States District Court for the Southern District of Alabama (Southern Division) as a class action on behalf of all consumers who purchased a certain air purifier from us alleging, among other things, that such products fail to perform the purposes for which they are advertised and sold and seeking unspecified damages. The class has not been certified. We believe this lawsuit is without merit and intend to defend ourselves vigorously.

The Company, in March of 2006, initiated a voluntary recall of one of its products in conjunction with the Consumer Product Safety Commission. The Company has been providing a product with comparable features in exchange for the recalled product. The Company does not believe the cost of this exchange to be material.

We are also involved in various legal proceedings incidental to the conduct of our business. We do not believe that any of these legal proceedings will have a material adverse effect on our financial condition, results of operations, or cash flows.

7. Segment Information

Business conducted by the Company is segmented into two distinct areas determined by the method of distribution channel. The retail segment is comprised of all full-year stores in addition to all temporary stores and kiosks. Retail product distribution is conducted directly through the store location. The direct marketing segment is comprised of two catalog titles (Hard-to-Find Tools and Brookstone Catalog), the Internet site

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www.Brookstone.com and sales to corporate customers. Direct marketing product distribution is conducted through the Company’s direct marketing customer sales and contact center, through its distribution facility located in Mexico, Missouri and by its vendors. Both segments of the Company sell similar products, although not all Company products are fully available within both segments.

All costs directly attributable to the direct marketing segment are so charged while all remaining operating costs are charged to the retail segment. The Company’s management does not review assets by segment and it is impracticable for the Company to report revenues by product or similar group products.

The tables below disclose segment net sales and pre-tax loss for the thirteen and twenty-six week periods ended July 1, 2006 and July 30, 2005 (in thousands).

Thirteen-weeks:
	Net Sales				Income (Loss) Before Taxes and Discontinued Operations
	Successor		Predecessor		Successor			Predecessor
	July 1, 2006		July 30, 2005		July 1, 2006			July 30, 2005
Reportable segment:
Retail	$	74,521	$	74,445	$	(8,374	)	$	(5,102	)
Direct Marketing		16,801		13,076		1,807			881
Reconciling items:
Interest expense		—		—		(6,526	)		(391	)
Interest income		—		—		348			478
Consolidated:	$	91,322	$	87,521	$	(12,745	)	$	(4,134	)
Twenty-six weeks:
	Net Sales				Income (Loss) Before Taxes and Discontinued Operations
	July 1, 2006		July 30, 2005		July 1, 2006			July 30, 2005
Reportable segment:
Retail	$	138,549	$	140,291	$	(23,365	)	$	(15,762	)
Direct Marketing		29,482		24,017		1,921			1,431
Reconciling items:
Interest expense		—		—		(12,970	)		(836	)
Interest income		—		—		993			939
Consolidated:	$	168,031	$	164,308	$	(33,421	)	$	(14,228	)

8. Joint Ventures

Two airport stores in Dallas Fort Worth, two airport stores in Las Vegas, two airport stores in Chicago and four airport stores in Atlanta operate under separate joint venture arrangements with respect to each city. The Company has a 65% ownership interest in the Dallas Fort Worth venture, an 80% ownership interest in the Las Vegas venture, a 70% ownership interest in the Chicago venture and a 49% ownership interest in the Atlanta venture. The Dallas Fort Worth, Las Vegas and Chicago ventures have been consolidated since inception (Fiscal 2005 for the Dallas Fort Worth venture, Fiscal 2003 for the Las Vegas venture and Fiscal 2001 for the Chicago venture) based on the Company’s ownership of the majority voting interests. Prior to Fiscal 2004, other party interests, consisting of the Chicago and Las Vegas partners’ interests, were included in Selling, General and Administrative Expenses due to immateriality.

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Under the requirements of the Financial Accounting Standards Board’s Interpretation No. 46(R) (“FIN 46(R)”), variable interest entities are required to be consolidated if the total equity investment at risk is not sufficient to permit the entity to finance its activities without financial support or the equity investors lack certain specified characteristics of a controlling financial interest. The Company reviewed the requirements of FIN 46(R) and determined that the Atlanta joint venture qualifies as a Variable Interest Entity (“VIE”) as of its inception date in Fiscal 2001 and that the Company is the primary beneficiary of the VIE.

9. Post-Retirement Pension and Medical Benefit Plans

The Company contributed more than the minimum required amount for the past year to the pension plan. The Company is required to contribute approximately $100,000 in Fiscal 2006. In addition, in Fiscal 2006, the Company intends to contribute approximately $500,000 to maintain a funded status that is more than the minimal required level under ERISA.

The components of net periodic pension cost were as follows:

	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 1, 2006			July 30, 2005			July 1, 2006			July 30, 2005
Service cost	$	31,000		$	31,000		$	62,000		$	62,000
Interest cost		78,000			77,000			156,000			154,000
Expected return on plan assets		(77,000	)		(75,000	)		(154,000	)		(150,000	)
Amortization of prior service cost		—			—			—			—
Recognized net actuarial loss		—			31,000			—			62,000
Net periodic benefit cost	$	32,000		$	64,000		$	64,000		$	128,000

The components of the net periodic post-retirement medical benefits cost were:

	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 1, 2006		July 30, 2005			July 1, 2006		July 30, 2005
Service cost	$	4,000	$	5,000		$	8,000	$	10,000
Interest cost		15,000		17,000			30,000		34,000
Amortization of prior service cost		—		(15,000	)		—		(30,000	)
Recognized net actuarial gain		—		(1,000	)		—		(2,000	)
Net periodic benefit cost	$	19,000	$	6,000		$	38,000	$	12,000

10. Debt

In connection with the transaction, the Company issued $185.0 million aggregate principle amount of 12.0% Second Lien Senior Secured Notes due October 15, 2012. These notes bear interest at 12% per annum payable in semi-annual installments on April and October of each year commencing April 15, 2006.

In addition, the senior secured credit facility entered into by the Company concurrently with the closing of the transactions provides for loans in an aggregate amount of up to $100.0 million (subject to a borrowing base limitation) and includes a letter of credit subfacility, a swingline subfacility and a stretch loan subfacility providing for increased advance rates on the borrowing base assets.

Lastly, the Company has a real estate loan on its headquarters facility and has a capital lease obligation on its Mexico, Missouri distribution center.

As of December 31, 2005 and July 1, 2006, the Company was in compliance with all related debt covenants.

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11. Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006. The Company has not yet completed its evaluation of the impact of adoption on the Company’s financial position or results of operations.

12. Condensed Consolidating Financial Information

The following condensed consolidating financial information presents (1) Brookstone, Inc., the parent and a guarantor of the 12% Second Lien Senior Secured notes due 2012 (the “notes”), (2) Brookstone Company, Inc., the issuer of the notes, (3) Brookstone, Inc.’s guarantor subsidiaries of the notes (all of which are wholly-owned subsidiaries of Brookstone, Inc.) and (4) Brookstone, Inc.’s non-guarantor, non-wholly owned subsidiaries. Separate financial statements of the parent and guarantor subsidiaries are not presented because they are jointly, severally, fully and unconditionally liable under the guarantees. The investments in subsidiaries are accounted for under the equity basis of accounting.

Included in other expenses are revenues and expenses from management and royalty agreements among Brookstone, Inc. and its subsidiaries, which are eliminated in consolidation.

Financial information for the predecessor periods, prior to the issuance of the notes, present Brookstone, Inc., Brookstone Company, Inc. and its subsidiaries as if the guarantor agreements existed during such periods.

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Brookstone, Inc.

Predecessor Condensed Consolidating Balance Sheet

July 30, 2005

(In thousands)

(Unaudited)

	Parent		Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	46,336	$	272	$	5	$	—		$	46,613
Receivables, net		—		3,215		3,093		1,615		—			7,923
Merchandise inventories		—		18,768		58,054		144		(1,087	)		75,879
Deferred income taxes, net		—		5,097		7,174		—		—			12,271
Prepaid expenses		—		2,522		4,793		—		—			7,315
Total current assets		—		75,938		73,386		1,764		(1,087	)		150,001
Deferred income taxes, net		—		5,228		—		—		—			5,228
Property, plant and equipment, net		—		17,538		55,758		1,066		—			74,362
Other assets		159,525		113,961		6,864		—		(277,137	)		3,213
Total assets	$	159,525	$	212,665	$	136,008	$	2,830	$	(278,224	)	$	232,804
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	8,773	$	3,303	$	—	$	—		$	12,076
Other current liabilities		—		21,179		8,045		—		—			29,224
Total current liabilities		—		29,952		11,348		—		—			41,300
Other long-term liabilities		—		16,721		68,270		—		(62,320	)		22,668
Long-term debt		—		6,467		1,841		—		—			8,308
Other party interests in consolidated entities		—		—		—		—		1,004			1,004
Total shareholders’ equity		159,525		159,525		54,549		2,830		(216,905	)		159,524
Total liabilities and shareholders’ equity	$	159,525	$	212,665	$	136,008	$	2,830	$	(278,224	)	$	232,804

13

Brookstone, Inc.

Successor Condensed Consolidating Balance Sheet

July 1, 2006

(In thousands)

(Unaudited)

	Parent		Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	23,191	$	407		$	6	$	—		$	23,604
Receivables, net		—		4,378		3,205			2,325		(245	)		9,663
Merchandise inventories		—		15,013		58,609			192		(38	)		73,776
Deferred income taxes, net		—		3,831		12,873			—		—			16,704
Prepaid expenses		—		1,810		7,193			—		—			9,003
Total current assets		—		48,223		82,287			2,523		(283	)		132,750
Property, plant and equipment, net		—		18,895		54,344			1,392		—			74,631
Intangible assets, net		—		131,813		—			—		—			131,813
Goodwill		—		192,453		—			—		—			192,453
Other assets		240,311		135,850		4,249			—		(363,110	)		17,300
Total assets	$	240,311	$	527,234	$	140,880		$	3,915	$	(363,393	)	$	548,947
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	12,562	$	—		$	—	$	—		$	12,562
Other current liabilities		—		30,884		10,213			246		(245	)		41,098
Total current liabilities		—		43,446		10,213			246		(245	)		53,660
Other long-term liabilities		—		8,499		80,497			—		(69,296	)		19,700
Long-term debt		—		188,806		1,745			—		—			190,551
Long-term tax liability		—		46,172		(2,742	)		—		—			43,430
Other party interests in consolidated entities		—		—		—			—		1,296			1,296
Total shareholders’ equity		240,311		240,311		51,167			3,669		(295,148	)		240,310
Total liabilities and shareholders’ equity	$	240,311	$	527,234	$	140,880		$	3,915	$	(363,393	)	$	548,947

14

Brookstone, Inc.

Successor Condensed Consolidating Balance Sheet

December 31, 2005

(In thousands)

	Parent		Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	75,926	$	394		$	6	$	—		$	76,326
Receivables, net		—		3,242		6,014			1,895		(245	)		10,906
Merchandise inventories		—		3,817		71,733			152		14			75,716
Deferred income taxes, net		—		1,119		3,828			—		—			4,947
Prepaid expenses		—		4,235		4,882			—		—			9,117
Total current assets		—		88,339		86,851			2,053		(231	)		177,012
Deferred income taxes, net Property, plant and equipment, net		—		19,211		55,494			1,623		—			76,328
Intangible assets, net		—		132,271		—			—		—			132,271
Goodwill		—		192,453		—			—		—			192,453
Other assets		266,322		131,332		55,824			—		(434,115	)		19,363
Total assets	$	266,322	$	563,606	$	198,169		$	3,676	$	(434,346	)	$	597,427
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	22,012	$	—		$	—	$	—		$	22,012
Other current liabilities		—		32,828		21,887			244		(245	)		54,714
Total current liabilities		—		54,840		21,887			244		(245	)		76,726
Other long-term liabilities		—		7,259		109,838			—		(98,135	)		18,962
Long-term debt		—		189,051		1,798			—		—			190,849
Long term tax liability		—		46,134		(2,742	)		—		—			43,392
Commitments and contingencies Other party interests in consolidated entities		—		—		—			—		1,176			1,176
Total shareholders’ equity		266,322		266,322		67,388			3,432		(337,142	)		266,322
Total liabilities and shareholders’ equity	$	266,322	$	563,606	$	198,169		$	3,676	$	(434,346	)	$	597,427

15

Brookstone, Inc.

Predecessor Condensed Consolidating Statement of Operations

For the thirteen-weeks ended July 30, 2005

(Unaudited)

	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	12,719		$	73,836		$	2,777	$	(1,811	)	$	87,521
Cost of sales		—			11,327			52,071			1,440		(1,811	)		63,027
Gross profit		—			1,392			21,765			1,337		—			24,494
Selling, general and administrative expenses		—			6,276			21,490			702		—			28,468
Other expenses (income)		—			(4,562	)		4,562			—		—			—
Income (loss) from continuing operations		—			(322	)		(4,287	)		635		—			(3,974	)
Interest expense, net		—			(188	)		99			2		—			(87	)
Income (loss) before taxes, other party interests in consolidated entities and discontinued operations		—			(134	)		(4,386	)		633		—			(3,887	)
Other party interests in consolidated entities		—			—			—			—		247			247
Income (loss) before taxes and discontinued operations		—			(134	)		(4,386	)		633		(247	)		(4,134	)
Income tax benefit		—			(52	)		(1,523	)		—		—			(1,575	)
Income (loss) from continuing operations before equity income		—			(82	)		(2,863	)		633		(247	)		(2,559	)
Equity income in subsidiaries, net of tax		(5,749	)		(5,667	)		386			—		11,030			—
Income (loss) from continuing operations		(5,749	)		(5,749	)		(2,477	)		633		10,783			(2,559	)
Loss on discontinued operations, net of tax		—			—			(3,190	)		—		—			(3,190	)
Net income (loss)	$	(5,749	)	$	(5,749	)	$	(5,667	)	$	633	$	10,783		$	(5,749	)

16

Brookstone, Inc.

Predecessor Condensed Consolidating Statement of Operations

For the twenty-six weeks ended July 30, 2005

(In thousands)

(Unaudited)

	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	23,780		$	138,384		$	5,530	$	(3,386	)	$	164,308
Cost of sales		—			22,126			99,072			2,841		(3,386	)		120,653
Gross profit		—			1,654			39,312			2,689		—			43,655
Selling, general and administrative expenses		—			14,176			41,919			1,385		—			57,480
Other expenses (income)		—			(10,420	)		10,420			—		—			—
Income (loss) from continuing operations		—			(2,102	)		(13,027	)		1,304		—			(13,825	)
Interest expense, net		—			(329	)		221			5		—			(103	)
Income (loss) before taxes, other party interests in consolidated entities and discontinued operations		—			(1,773	)		(13,248	)		1,299		—			(13,722	)
Other party interests in consolidated entities		—			—			—			—		506			506
Income (loss) before taxes and discontinued operations		—			(1,773	)		(13,248	)		1,299		(506	)		(14,228	)
Income tax benefit		—			(738	)		(4,732	)		—		—			(5,470	)
Income (loss) from continuing operations before equity income		—			(1,035	)		(8,516	)		1,299		(506	)		(8,758	)
Equity income in subsidiaries, net of tax		(12,528	)		(11,493	)		793			—		22,228			—
Income (loss) from continuing operations		(12,528	)		(12,528	)		(7,723	)		1,299		22,722			(8,758	)
Income (loss) on discontinued operations, net of tax benefit		—			—			(3,770	)		—		—			(3,770	)
Net income (loss)	$	(12,528	)	$	(12,528	)	$	(11,493	)	$	1,299	$	22,722		$	(12,528	)

17

Brookstone, Inc.

Successor Condensed Consolidating Statement of Operations

For the thirteen-weeks ended July 1, 2006

(In thousands)

(Unaudited)

	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	12,455		$	74,983		$	3,987	$	(103	)	$	91,322
Cost of sales		—			8,782			55,736			1,995		(103	)		66,410
Gross profit		—			3,673			19,247			1,992		—			24,912
Selling, general and administrative expenses		—			5,130			24,936			1,054		—			31,120
Other expenses (income)		—			(3,659	)		3,659			—		—			—
Income (loss) from continuing operations		—			2,201			(9,348	)		938		—			(6,208	)
Interest expense, net		—			6,071			105			2		—			6,178
Income (loss) before taxes, other party interests in consolidated entities and discontinued operations		—			(3,869	)		(9,453	)		936		—			(12,386	)
Other party interests in consolidated entities		—			—			—			—		359			359
Income (loss) before taxes and discontinued operations		—			(3,869	)		(9,453	)		936		(359	)		(12,745	)
Income tax provision		—			(1,277	)		(582	)		—		—			(1,859	)
Income (loss) from continuing operations before equity income		—			(2,592	)		(8,871	)		936		(359	)		(10,886	)
Equity income in subsidiaries, net of tax		(10,962	)		(8,370	)		577			—		18,755			—
Income (loss) from continuing operations		(10,962	)		(10,962	)		(8,294	)		936		18,396			(10,886	)
Income (loss) on discontinued operations, net of tax benefit		—			—			(76	)		—		—			(76	)
Net income (loss)	$	(10,962	)	$	(10,962	)	$	(8,370	)	$	936	$	18,396		$	(10,962	)

18

Brookstone, Inc.

Successor Condensed Consolidating Statement of Operations

For the twenty-six weeks ended July 1, 2006

(In thousands)

(Unaudited)

	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	22,826		$	137,528		$	7,209	$	468		$	168,031
Cost of sales		—			15,632			107,639			3,612		468			127,351
Gross profit		—			7,194			29,889			3,597		—			40,680
Selling, general and administrative expenses		—			11,474			48,104			1,900		—			61,478
Other expenses (income)		—			(8,134	)		8,134			—		—			—
Income (loss) from continuing operations		—			3,854			(26,349	)		1,697		—			(20,798	)
Interest expense, net		—			11,733			239			5		—			11,977
Income (loss) before taxes, other party interests in consolidated entities and discontinued operations		—			(7,879	)		(26,588	)		1,692		—			(32,775	)
Other party interests in consolidated entities		—			—			—			—		(646	)		(646	)
Income (loss) before taxes and discontinued operations		—			(7,879	)		(26,588	)		1,692		(646	)		(33,421	)
Income tax provision		—			(2,712	)		(8,801	)		—		—			(11,513	)
Income (loss) from continuing operations before equity income		—			(5,167	)		(17,787	)		1,692		(646	)		(21,908	)
Equity income in subsidiaries, net of tax		(22,226	)		(17,059	)		1,046			—		38,239			—
Income (loss) from continuing operations		(22,226	)		(22,226	)		(16,741	)		1,692		37,593			(21,908	)
Income (loss) on discontinued operations, net of tax benefit		—			—			(318	)		—		—			(318	)
Net income (loss)	$	(22,226	)	$	(22,226	)	$	(17,059	)	$	1,692	$	37,593		$	(22,226	)

19

Brookstone, Inc.

Predecessor Condensed Consolidating Statement of Cash Flows

For the twenty-six weeks ended July 30, 2005

(In thousands)

(Unaudited)

	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(12,528	)	$	(12,528	)	$	(11,493	)	$	1,299		$	22,722		$	(12,528	)
Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities
Depreciation and amortization		—			1,412			5,450			159			—			7,021
Amortization of debt issuance costs		—			92			—			—			—			92
Stock-based compensation expense		—			786			—			—			—			786
Impairment charge		—			—			3,740			—			—			3,740
Other party interests in consolidated entities		—			—			—			—			506			506
Deferred income taxes		—			(7,041	)		(1,313	)		—			—			(8,354	)
Related tax benefits on exercise of stock options		—			175			—			—			—			175
Equity income in subsidiary		12,528			11,493			(793	)		—			(23,228	)		—
Decrease (increase) in other assets		—			(2,583	)		9,769			—			(8,658	)		(1,472	)
Decrease (increase) in other long-term liabilities		—			377			(7,822	)		—			7,753			308
Changes in working capital:
Accounts receivable, net		—			22			1,740			178			(11	)		1,929
Merchandise inventories		—			(6,873	)		6,745			(3	)		(163	)		(294	)
Prepaid expenses		—			(969	)		(393	)		—			—			(1,362	)
Accounts payable		—			(8,629	)		3,303			—			—			(5,326	)
Other current liabilities		—			(14,714	)		(2,563	)		(8	)		9			(17,276	)
Net cash provided by (used for) operating activities		—			(38,980	)		6,370			1,625			(1,070	)		(32,055	)
Cash flows from investing activities:
Expenditures for property, plant and equipment		—			(960	)		(6,330	)		39			—			(7,251	)
Net cash (used for) provided by investing activities		—			(960	)		(6,330	)		39			—			(7,251	)
Cash flows from financing activities:
Payments on long-term debt		—			(400	)		(52	)		—			—			(452	)
Cash distributions to joint venture partners		—			—			—			(1,663	)		1,663			—
Capital distribution to joint venture partners		—			—			—			—			(593	)		(593	)
Proceeds from exercise of stock options		—			759			—			—			—			759
Net cash provided by (used for) financing activities		—			359			(52	)		(1,663	)		1,070			(286	)
Net increase in cash and cash equivalents		—			(39,581	)		(12	)		1			—			(39,592	)
Cash and cash equivalents at beginning of period		—			85,917			284			4			—			86,205
Cash and cash equivalents at end of period	$	—		$	46,336		$	272		$	5		$	—		$	46,613

20

Brookstone, Inc.

Successor Condensed Consolidating Statement of Cash Flows

For the twenty-six weeks ended July 1, 2006

(In thousands)

(Unaudited)

	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(22,226	)	$	(22,226	)	$	(17,059	)	$	1,692		$	37,593		$	(22,226	)
Adjustments to reconcile net income (loss) to net cash used for operating activities
Depreciation and amortization		—			1,794			5,058			231			—			7,083
Amortization of revaluation of leases		—			—			(102	)		—			—			(102	)
Amortization of debt discount		—			154			—			—			—			154
Amortization of debt issuance cost		—			1,090			—			—			—			1,090
Stock-based compensation expense		—			503			—			—			—			503
Other party interests in consolidated entities		—			—			—			—			646			646
Deferred income taxes		—			(2,712	)		(9,045	)		—			—			(11,757	)
Equity income in subsidiary		22,226			17,059			(1,046	)		—			(38,239	)		—
Decrease (increase) in other assets		—			(22,229	)		53,062			(930	)		(28,890	)		1,013
Decrease (increase) in other long-term liabilities		—			1,240			(28,846	)		—			28,840			1,234
Changes in working capital:
Accounts receivable, net		—			(1,136	)		2,809			(430	)		—			1,243
Merchandise inventories		—			(11,196	)		13,125			(39	)		50			1,940
Prepaid expenses		—			2,425			(2,311	)		—			—			114
Accounts payable		—			(9,450	)		—			—			—			(9,450	)
Other current liabilities		—			(4,987	)		(11,673	)		2			—			(16,658	)
Net cash provided by (used for) operating activities		—			(49,671	)		3,972			526			—			(45,173	)
Cash flows from investing activities:
Expenditures for property, plant and equipment		—			(1,020	)		(3,908	)		—			—			(4,928	)
Net cash used for investing activities		—			(1,020	)		(3,908	)		—			—			(4,928	)
Cash flows from financing activities:
Cash payment related to debt financing		—			(349	)		—			—			—			(349	)
Payments on long-term debt		—			(400	)		(51	)		—			—			(451	)
Stock purchase		—			(1,520	)		—			—			—			(1,520	)
Capital contribution		—			225			—			—			—			225
Cash distributions to joint venture partners		—			—			—			(526	)		—			(526	)
Net cash provided by (used for) financing activities		—			(2,044	)		(51	)		(526	)		—			(2,621	)
Net increase in cash and cash equivalents		—			(52,735	)		13			—			—			(52,722	)
Cash and cash equivalents at beginning of period		—			75,926			394			6			—			76,326
Cash and cash equivalents at end of period	$	—		$	23,191		$	407		$	6		$	—		$	23,604

21

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Founded in 1965, we are a leading nationwide specialty retailer and product development company. Our strategy is to develop unique, innovative, Brookstone-branded products and offer them to customers via our proprietary distribution channels, which consist of our retail stores, our internet website and our catalogs. Our products are intended to make some aspect of our customer’s life easier, better, more enjoyable or more fun, qualities that we believe make our products particularly well suited for gift giving. Our portfolio is composed of the Brookstone and Hard-to-Find Tools brands. The Brookstone brand includes products in four main categories: home and office, travel and auto, outdoor living and health and fitness, and it consists of approximately 950 stock-keeping units, or SKUs. Approximately half of Brookstone products are priced at $40.00 or less, although items in our stores range in price from less than $5.00 to approximately $4,300.00. The Hard-to-Find Tools brand, which operates primarily through catalogs and the internet, features products that offer innovative solutions to common problems and tasks around the home and garden.

Acquisition

Brookstone, Inc. was acquired on October 4, 2005 through a merger transaction with Brookstone Acquisition Corp., a Delaware corporation formed by OSIM International Ltd and affiliates of J.W. Childs Equity Partners III, L.P. and Temasek Capital (Private) Limited (collectively, the “Sponsors”). The acquisition was accomplished through the merger of Brookstone Acquisition Corp. with and into Brookstone, Inc., with Brookstone, Inc. as the surviving corporation of the merger (the “Transaction”) pursuant to an Agreement and Plan of Merger, dated as of April 15, 2005, and amended as of July 15, 2005, among the Company, Brookstone Holdings Corp. and Brookstone Acquisition Corp. As a result of the Transaction, the Company became a privately-held wholly owned subsidiary of OSIM Brookstone Holdings, L.P., the general partner of which is OSIM Brookstone Holdings, Inc.

Sale of Gardeners Eden

On June 29, 2005, the Company announced its plans to sell its Gardeners Eden business which consisted of five Gardeners Eden stores, one catalog title, Gardeners Eden and its internet site www.Gardenerseden.com. As a result, in the second quarter of Fiscal 2005, the Company began reflecting the results of operations from the Gardeners Eden business as a discontinued operation. For the thirteen-week periods ended July 1, 2006 and July 30, 2005, Gardeners Eden operations resulted in a net loss of $76 thousand (net of tax benefit of $37 thousand) and $3.2 million (net of tax benefit of $2.0 million), respectively. For the twenty-six week periods ended July 1, 2006 and July 30, 2005, Gardeners Eden operations resulted in a net loss of $318 thousand (net of tax benefit of $173 thousand) and $3.8 million (net of tax benefit of $2.4 million), respectively. The following Management’s Discussion and Analysis of Results of Operations exclude the discontinued operations of Gardener’s Eden.

Change in Fiscal Year

In November 2005, the Company changed its fiscal year end from the Saturday nearest the last day in January to the Saturday nearest the last day in December. As a result of the change, the second quarter Fiscal 2006 results are for the thirteen-week period from April 2, 2006 through July 1, 2006 as compared to the second quarter Fiscal 2005 results for the thirteen-week period from May 1, 2005 through July 30, 2005 and for the twenty-six week period of January 1, 2006 through July 1, 2006 compared to January 31, 2005 through July 30, 2005.

We did not recast our interim financial statements for Fiscal 2005 because it was not cost justifiable or practicable to compile such information.

Overview

Net sales for the thirteen-week period ended July 1, 2006 were $91.3 million, an increase of 4.3% compared to the second fiscal quarter of 2005. When compared to the same thirteen-week period in 2005 (April 3, 2005 through July 2, 2005), total sales were approximately flat and same store sales increased 1.0%. The Company experienced increase performances in the Massage, Audio, Stationary, Travel and Kitchen categories offset by decreases in the Games, Bedding, Garden and Wine categories. While the Company introduces new and updated

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products in many of its categories as part of its merchandising strategy, there can be no assurance that any such products in these categories will achieve the popularity of existing products or sell at planned levels, which failure could continue to affect our results. In addition, there can be no guarantee that existing products will sell at historical or planned levels, which failure could affect our results.

The Company has provided below a statistical summary of its operating results. We have incorporated information into the discussion below because we believe it will assist the reader in understanding the Company’s results of operation on a comparative basis and in recognizing underlying trends.

	Thirteen-weeks ended				Twenty-six weeks ended
	Successor		Predecessor		Successor		Predecessor
	July 1, 2006		July 30, 2005		July 1, 2006		July 30, 2005
Revenues, net
Retail segment	81.6	%	85.1	%	82.5	%	85.4	%
Direct segment	18.4		14.9		17.5		14.6
Total revenues	100.0		100.0		100.0		100.0
Cost and expenses:
Cost of sales	72.7		72.0		75.8		73.4
Selling, general and administrative expenses	34.1		32.5		36.6		35.0
Loss from continuing operations	(6.8	)	(4.5	)	(12.4	)	(8.4	)
Interest expense, net	6.8		(0.1	)	7.1		(0.1	)
Loss before taxes and other party interests in consolidated entities and discontinued operations	(13.6	)	(4.4	)	(19.5	)	(8.4	)
Other party interests in consolidated entities	0.4		0.3		0.4		0.3
Loss before taxes and discontinued operations	(14.0	)	(4.7	)	(19.9	)	(8.7	)
Income tax benefit	(2.0	)	(1.8	)	(6.9	)	(3.3	)
Loss on discontinued operations, net of tax	(0.1	)	(3.6	)	(0.2	)	(2.3	)
Net loss	(12.0	)%	(6.6	)%	(13.2	)%	(7.6	)%

Results of Operations

For the thirteen-week period ended July 1, 2006, net sales increased 4.3% as compared to the second fiscal quarter of 2005. Net sales in the retail segment for the thirteen-week period decreased slightly ($76 thousand) to $74.5 million as compared to $75.4 million for the second quarter last year. The change was primarily comprised of a decrease in same store sales ($600 thousand) versus the second quarter in 2005 which was driven by decreases in the Games, Bedding, Garden and Wine categories offset by increases in the Massage, Audio, Stationary, Travel and Kitchen categories. In addition, revenue during the thirteen-week period ended July 1, 2006 was impacted by increases to reserves ($2.4 million) for returns from customers offset by increased revenue from customers for shipping and handling ($50 thousand), increased revenues generated from the opening of 23 new stores ($4.2 million) and decreased revenue resulting from six store closings ($1.0 million) subsequent to the second quarter of Fiscal 2005. For the twenty-six week period ended July 1, 2006, net sales in the retail segment decreased 1.3%, or $1.7 million, to $138.5 million. This change was comprised of a decrease in same stores of 6.4%, or $8.6 million, driven by decreases in the Games, Bedding, Garden and Wine categories offset by increase performances in the

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Massage, Audio, Stationary, Travel and Kitchen categories. Further contributing to the decrease was an increase in reserves for returns from customers ($1.0 million) and a decrease in revenues ($100 thousand) from customers for shipping and handling. Offsetting these decreases were additional revenues from the opening of 23 new stores ($7.5 million) (partially offset by six store closings $1.5 million) subsequent to the second quarter of Fiscal 2005. The total number of Brookstone stores open on July 1, 2006 was 307 versus 290 on July 30, 2005.

For the thirteen-week period ended July 1, 2006 direct marketing sales increased 28.5% to $16.8 million as compared to the second quarter of 2005, primarily driven by increased internet sales. The increase includes an increase of $600 thousand generated from revenues from customers for shipping and handling. For the twenty-six week period ended July 1, 2006 direct marketing sales increased 22.8% to $29.5 million as compared to the twenty-six week period of fiscal 2005.

For the thirteen-week period ended July 1, 2006, gross profit as a percentage of net sales decreased 0.7% to 27.3% versus 28.0% for the second quarter of 2005. This decrease is a result of an increase in occupancy costs of 0.7%, an increase of 0.3% in order postage expense (costs associated with the delivery of products to customers) offset by an increase in product margins of 0.3%. For the twenty-six week period ended July 1, 2006, gross profit as a percentage of net sales decreased 2.4% to 24.2% versus 26.6% for the twenty-six week period in Fiscal 2005. This decrease is comprised of an increase in occupancy costs of 1.5% and a decrease in product margins of 0.9%. Occupancy costs as a percentage of net sales increased in the second quarter and for the twenty-six week period of Fiscal 2006 primarily as a result of the same store sales decrease. The increases in product margins for the quarter resulted primarily from decreased markdowns in the period, while the year-to-date decrease is the result of increased markdowns.

For the thirteen-week period ended July 1, 2006, selling, general and administrative expenses as a percentage of net sales increased 1.6% to 34.1% versus 32.5% for the second quarter of Fiscal 2005 primarily as a result of increased payroll costs as a percentage of sales of 0.7% and increase advertising as a percentage of sales of 0.8%. For the twenty-six week period ended July 1, 2006, selling, general and administrative expenses as a percentage of net sales increased 1.6% as compared to the twenty-six week period ended July 30, 2005. This increase is comprised principally of increases in payroll (1.4%) and advertising (0.5%) expenses. The payroll increase in both periods was driven by the decrease in same store sales experienced and the advertising expense increase is related to increased catalog circulation in the direct marketing segment.

Net interest expense for the thirteen-week period ended July 1, 2006 was $6.2 million, compared to net interest income of $87 thousand for the first quarter of Fiscal 2005. For the twenty-six week period ended July 1, 2006 net interest expense was $12.0 million as compared to net interest income of $103 thousand for the twenty-six week period in Fiscal 2005. The increase resulted primarily from interest expense associated with the issuance of the senior secured 12% notes.

In the second quarter of Fiscal 2006, the Company recorded an income tax benefit on continuing operations of $1.9 million, or 2.0% of net sales, as compared to an income tax benefit on continuing operations of $1.6 million, or 1.8% of net sales, in the second quarter of Fiscal 2005. For the twenty-six week period the Company recorded an income tax benefit on continuing operations of $11.5 million or 6.9% in Fiscal 2006 compared to an income tax benefit on continuing operations of $5.5 million in Fiscal 2005. For the second quarter in Fiscal 2006, the tax rate on continuing operations was 14.6% of loss before income taxes based upon calculation of the discrete tax rate for the twenty-six week period ended July 1, 2006. For the second quarter of Fiscal 2005, the tax rate on continuing operations was 38.1% of loss before income taxes, based upon the estimated annual effective tax rate for Fiscal 2005. For the twenty-six week period the tax rate on continuing operations was 34.4% and 38.4% in Fiscal 2006 and Fiscal 2005, respectively, based upon the methodologies described for the quarters. The decline in the effective tax rate for the current period from the prior year is related to the impact on the second quarter resulting from the use of the discrete period method for estimating taxes for the twenty-six weeks, as well as permanent tax differences.

Two airport stores in Dallas Fort Worth, two airport stores in Las Vegas, two airport stores in Chicago and four airport stores in Atlanta operate under separate joint venture arrangements with respect to each city. The Company has a 65% ownership interest in the Dallas Fort Worth venture, an 80% ownership interest in the Las Vegas venture, a 70% ownership interest in the Chicago venture and a 49% ownership interest in the Atlanta venture. Other Party Interests in Consolidated Entities represents the ownership interests in the net income for these joint ventures belonging to the Company’s joint venture partners (the 35% ownership in the Dallas Fort Worth venture, the 20% ownership interest in the Las Vegas venture, the 30% ownership interest in the Chicago venture and the

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51% ownership interest in the Atlanta venture). For the thirteen-weeks ended July 1, 2006 and July 30, 2005, other party interests in consolidated entities totaled $359 thousand and $247 thousand, respectively. For the twenty-six week periods other party interests in consolidated entities totaled $646 thousand and $506 thousand, respectively.

As a result of the foregoing, for the thirteen-week and twenty-six week periods ended July 1, 2006 the Company reported a loss from continuing operations of $6.2 million and $20.8 million, respectively, as compared to a loss from continuing operations of $4.0 and $13.8 million for the thirteen-week and twenty-six week periods ended July 30, 2005, respectively. After discontinued operations, for the thirteen-week and twenty-six week periods ended July 1, 2006 the Company reported a loss of $11.0 million and $22.2 million, respectively, as compared to a loss of $5.7 and $12.5 million for the thirteen-week and twenty-six week periods ended July 30, 2005, respectively

Financial Condition, Liquidity and Capital Resources

Cash flows for the twenty-six week period ended July 1, 2006

For the twenty-six week period ended July 1, 2006, the Company’s cash position decreased $52.7 million to $23.6 million. Cash used for operations totaled $45.2 million primarily as a result of payment of merchandise purchases during the holiday selling season, the Company’s net loss from operations and a decrease in other current liabilities resulting primarily from the payment of sales taxes.

Cash of $4.9 million was utilized to fund capital expenditures in the twenty-six week period ended July 1, 2006 primarily related to the opening of eight new Brookstone stores, the remodeling of three Brookstone stores and construction related to stores anticipated to open or be remodeled in the fiscal year. In Fiscal 2006, the Company anticipates opening approximately 17 new Brookstone stores and remodeling approximately 7 locations.

Net cash used for financing activities totaled approximately $2.6 million in the twenty-six week period ended July 1, 2006 reflecting a capital distribution to our parent company ($1.5 million), payments on long-term debt (($451) thousand) and distributions to joint venture partners ($526 thousand).

Cash flows for the twenty-six week period ended July 30, 2005

For the twenty-six week period ended July 30, 2005, the Company’s cash position decreased $39.6 million to $46.6 million. Cash used for operations totaled $32.1 million primarily as a result of the Company’s net loss from operations and a decrease in other current liabilities resulting primarily from the payment of income taxes ($11.0 million) and the payment of accrued incentive compensation ($5.4 million).

Cash used for financing activities totaled approximately $286,000 for the twenty-six week period ended July 30, 2005 as a result of the Company’s payments of long-term debt of $452,000 and cash distributions paid to joint venture partners of $593,000. These payments were partially offset by proceeds of $759,000 from the exercise of stock options and payments for stock under the employee stock purchase plan.

Cash of $7.3 million was utilized to fund capital expenditures in the twenty-six week period ended July 30, 2005 primarily related to the opening of four new stores, the remodeling of five stores and construction related to stores anticipated to open or be remodeled in the third fiscal quarter.

Other Balance Sheet Changes

Receivables decreased 11.4% to $9.7 million at July 1, 2006 as compared to $10.9 million at December 31, 2005 primarily as a result of the collection of construction allowances due from landlords. Merchandise inventories decreased slightly to $73.8 million at July 1, 2006 as compared to $75.7 million at December 31, 2006. Deferred income taxes increased $11.8 million as a result of the Company’s recording an income tax benefit related to the loss before taxes incurred by the Company. Additionally, other assets decreased $2.1 million to $17.3 million from $19.4 million at December 31, 2005 principally related to costs to produce catalogs that were mailed during the second quarter.

The Company maintains a revolving credit facility to finance inventory purchases, which historically peak in the third quarter in anticipation of the winter holiday selling season. At July 1, 2006 and December 31, 2005, the

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Company had no borrowings outstanding under its senior secured credit facility. The Company had no outstanding borrowings under its previous revolving credit agreement (which was terminated upon re-closing of the transaction) at July 30, 2005.

Cash flows for the remainder of Fiscal 2006

The Company believes that cash on hand, anticipated cash generated from operations and available borrowings will be sufficient to finance its remaining cash expenditures and capital requirements in Fiscal 2006. In Fiscal 2006, the Company anticipates funding a maximum of $600,000 for its obligation under its defined pension plan.

Critical Accounting Estimates

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 describe the significant accounting policies and critical accounting estimates used in the preparation of the consolidated financial statements. The Company’s management is required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from management’s estimates. There have been no significant changes in the Company’s critical accounting estimates during the quarter ended July 1, 2006.

Outlook: Important Factors and Uncertainties

Statements in this quarterly report which are not historical facts, including statements about the Company’s confidence or expectations, earnings, anticipated operations of its e-commerce sites and those of third-party service providers, and other statements about the Company’s operational outlook are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (“Reform Act”) and are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties include, without limitation, risks of changing market conditions in the overall economy and the retail industry, consumer demand, the effectiveness of e-commerce technology and marketing efforts, availability of products, availability of adequate transportation of such products, and other factors detailed from time to time in the Company’s annual and other reports filed with the Securities and Exchange Commission. Words such as “estimate”, “project”, “plan”, “believe”, “feel”, “anticipate”, “assume”, “may”, “will”, “should” and similar words and phrases may identify forward-looking statements. Statements about a sale of its Gardeners Eden business constitute forward-looking statements. Any statements in this release made in connection with the merger are not forward-looking statements within the meaning of the safe harbor provisions of the Reform Act. The Company may not be able to complete a sale on acceptable terms because of a number of factors, including failure to reach agreement with a purchaser. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligations to publicly release any revisions to these forward-looking statements or reflect events or circumstances after the date hereof.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

The Company’s primary market risk is its interest rate risk. The Company does not engage in trading activities and its foreign currency risk and commodity price risk is immaterial.

The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States, which impact interest paid on its debt. A 10% change in the weighted average interest rate on the Company’s variable rate debt would be immaterial to the Company’s consolidated financial positions, results of operations and cash flows.

The Company’s Fiscal 2005 annual report on Form 10-K posted on the Company’s website at

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www.brookstone.com also contains information about market risks under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” A complete excerpt of Item 7A of such report has been filed as Exhibit 99.1 to this report. There have been no material changes in our exposure to market risks during the thirteen-weeks ended July 1, 2006.

ITEM 4. Controls and Procedures.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of July 1, 2006 pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There have not been any changes in the Company’s internal controls over financial reporting that have occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings.

On September 15, 2004, a putative class action was commenced against us in the California Superior Court in Los Angeles County. The complaint, as amended, alleges, among other things, that we engaged in unfair business practices under California’s Unfair Competition Laws by selling certain air purifiers that failed to perform as intended. On May 4, 2006, the Superior Court issued a decision certifying that the action may be brought on a class-wide basis. On July 21, 2006, we filed a motion to de-certify the class based on a recent appellate decision that was issued. A trial is scheduled for March 5, 2007. We believe this lawsuit is without merit and intend to defend ourselves vigorously.

On June 23, 2005, we were served with a lawsuit in the United States District Court for the Southern District of Alabama (Southern Division) as a class action on behalf of all consumers who purchased a certain air purifier from us alleging, among other things, that such products fail to perform the purposes for which they are advertised and sold and seeking unspecified damages. The class has not been certified. We believe this lawsuit is without merit and intend to defend ourselves vigorously.

The Company, in March of 2006, initiated a voluntary recall of one of its products in conjunction with the Consumer Product Safety Commission. The Company has been providing a product with comparable features in exchange for the recalled product. The Company does not believe the cost of this exchange to be material.

We are also involved in various legal proceedings incidental to the conduct of our business. We do not believe that any of these legal proceedings will have a material adverse effect on our financial condition, results of operations, or cash flows.

ITEM 1A. Risk Factors

You should carefully consider the following risks regarding our Company. These and other risks could materially and adversely affect our business, results of operations or financial condition. You should also refer to the other information contained or incorporated by reference in this report.

Our results of operations are highly dependent on our sales during the winter holiday season and the Father’s Day selling season.

A high percentage of our annual sales and substantially all of our annual income from operations have historically been attributable to the winter holiday selling season. In addition, our sales in our second fiscal quarter are generally higher than sales during the first and third quarters as a result of sales in connection with Father’s Day. Like many retailers, we must make merchandising and inventory decisions for the winter holiday selling season and the Father’s Day selling season well in advance of actual sales. Accordingly, unfavorable economic conditions, weather conditions and/or deviations from projected demand for products during these seasons could have a material adverse effect on our results of operations for the entire fiscal year. While we have implemented certain measures to improve our results during periods outside of the winter holiday selling season and the Father’s Day selling season, such as the opening of stores in airports, we expect that our annual results of operations will remain dependent on our performance during the winter holiday selling season, and to a lesser extent, on our performance during the Father’s Day selling season.

Our ability to introduce innovative merchandise and updated products may impact our sales and profitability.

Successful implementation of our merchandising strategy depends on our ability to introduce in a timely manner new or updated products, which are affordable, functional in purpose, distinctive in quality and design and not widely available from other retailers. We expect that the popularity of a product or group of related products of the types we typically offer will be limited in time due to the continual changing nature of consumer preferences. In addition, if our products or substitutes for such products become widely available from other retailers (including

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mass-retailers, department stores or discount retailers), demand for these products from us may decline or we may be required to reduce our retail prices. If a competitor of our Company were to offer for sale new and innovative products that we did not offer for sale, customer demand for our goods could decline. A decline in the demand for, or a reduction in the retail prices of, our important existing products can cause declines in our sales and profitability if we are unable to introduce in a timely fashion new or replacement products of similar sales levels and profitability. Even with innovative merchandising, there remains a risk that the products will not sell at planned levels.

Changes in consumer preferences could adversely affect our business.

Our business in general is subject to changing consumer and industry trends, demands and preferences. Our continued success depends largely on the introduction and acceptance by our customers of new product lines and improvements to existing product lines that respond to such trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, and could materially adversely affect us. In addition, we may not have sufficient resources to make necessary investments or we may be unable to make the advances necessary to develop new products or improve our existing products to maintain our market position.

We are exposed to product liability claims and intellectual property infringement claims.

Although we seek to maintain quality standards at a high level, our products may have defects that could result in high rates of return, recalls or product liability claims. Such returns, recalls or claims could adversely affect profitability. Third parties may assert claims for patent or trademark infringement, or violation of other proprietary rights. If successful, such claims could result in the inability to sell a particular product or, in the case of a settlement or royalty, adversely impact the profitability of the product and could have a material adverse effect on our results of operations. Such claims could entail significant legal expenses even if they are ultimately resolved in our favor.

Our ability to protect our proprietary technology is uncertain and our inability to protect these rights could impair our competitive advantage and cause us to incur substantial expense to enforce our rights.

We actively pursue and protect, domestically and internationally, our corporate trademarks and other intellectual property rights to ensure that the quality of our brands and the value of our proprietary rights are maintained. We seek patents to establish and protect our proprietary rights relating to the technologies and products we have developed, are in the process of developing, or that we may develop in the future. We have taken and will continue, in the future, to take steps to broaden and enhance our patent protection for our proprietary products.

We cannot assure you that a third party will not infringe upon or design around any patent issued or licensed to us, or that these patents will otherwise be commercially viable. Litigation to establish the validity of patents, to defend against patent infringement claims of others and to assert patent infringement claims against others can be expensive and time-consuming even if the outcome is favorable to us. If the outcome is unfavorable to us, we may be required to pay damages, stop production and sales of infringing products or be subject to increased competition from similar products. We have taken and may, in the future, take steps to enhance our patent protection, but we cannot assure you that these steps will be successful or that, if unsuccessful, our patent protection will be adequate.

We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We attempt to protect our proprietary technology in large part by confidentiality agreements with our employees, consultants and other contractors. We cannot assure you, however, that these agreements will not be breached, that we will have adequate remedies for any breach or that competitors will not know of or independently discover our trade secrets.

Existing or future governmental regulations and legal uncertainties, including those relating to consumer protection, could have a material impact on our business or results from operations.

Our Company and its operations are subject to numerous laws, regulations and governmental policies and procedures on the international, federal, state and local levels, including, but not limited to, laws, regulations, policies, procedures, rulings, interpretations, or other governmental or quasi-governmental practices, regarding corporate governance, commerce, customs, international trade, labor and employment, importation tax, securities,

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accounting, and other laws and regulations which are, or are found to be, applicable to us. Changes to this legal and regulatory framework, or to any individual law or regulation, or governmental policy or procedure to which we are now, or are determined to be in the future, subject, could have a material impact on our business or results from operations.

In addition, we are subject to federal, state, local and foreign consumer protection laws and regulations, including laws prohibiting unfair and deceptive trade practices. The violation of these laws may give rise to private rights of action, including class action lawsuits. If any of these claims are successful, it could materially adversely affect our business. In addition, any amendments to these regulations may force us to change certain aspects of our business which may materially adversely affect our results of operations.

The success of our business is dependent on our ability to open new stores and temporary locations.

Our ability to open new stores, including airport locations, and to operate our temporary location program successfully depends upon, among other things, our capital resources and our ability to locate suitable sites, negotiate favorable rents and other lease terms and implement our operational strategy. In addition, because our store designs must evolve over time so that we may effectively compete for customers in top malls, airports and other retail locations, actual store-related capital expenditures may vary from historical levels due to such factors as the scope of remodeling projects, general increases in the costs of labor and materials and unusual product display requirements.

If our leases terminate or are not renewed upon expiration, we could be required to make significant capital expenditures to relocate our retail stores.

All of our retail stores are leased. There can be no assurance that upon termination or expiration of these leases we will be able to renew them on acceptable terms or at all. If we are unable to renew such leases, we could be required to make significant capital expenditures to relocate our retail stores.

We operate in a very competitive business environment.

The U.S. retail industry is highly competitive. We compete against large international and national players, as well as many regional competitors. Some of our principal competitors may be less highly leveraged than we are and have greater financial, marketing and distribution resources than we do. Accordingly, these competitors may be better able to withstand changes in conditions within the industries in which we operate, and may have significantly greater operating and financial flexibility than we do. These competitors could increase their market share and cause us to lose business from our customers.

As a result of this competitive environment, we face and will continue to face pressure on sales prices of our products from competitors. As a result of these pricing pressures, we may in the future experience reductions in our profit margins, revenues or sales. In addition, we will need to invest continuously in customer service and support, marketing and our sales force. We cannot assure you that we will be able to maintain or increase either current market share of our products or our price and operating margins successfully in the future.

Our business will suffer if certain key officers or employees discontinue employment with us or if we are unable to recruit and retain highly skilled personnel.

The success of our business is materially dependent upon the skills, experience and efforts of our key officers and employees. The loss of key personnel could have a material adverse effect on our business, operating results or financial condition. Our business also depends on our ability to continue to recruit, train and retain skilled employees, particularly highly-skilled and motivated, full-time and temporary associates with appropriate retail experience to work in management and in our stores and temporary locations. Further, because of the limited time periods during which temporary locations are open each year, the availability of suitable associates for such locations is limited. The market for these resources is highly competitive. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.

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Our business may be negatively impacted by poor economic conditions.

Our business has been and may in the future be impacted by economic conditions that tend to reduce the level of discretionary consumer spending. These conditions include high interest rates, inflation, unemployment, stock market uncertainty and low consumer confidence.

Computer systems or telephone services failures could have a material adverse effect on us.

Our success is dependent upon our computer hardware and software systems and our telecommunications systems. The internet portion of the direct marketing segment relies heavily on the proper operation of these systems, as well as on the continued operation of the external components of the internet, to market goods and to receive and process orders. The retail segment utilizes point of sale computers located in the stores. Our headquarters and distribution center rely on a wide variety of applications to carry on the business. These systems are subject to damage from natural disasters, power failures, hardware and software failures, security breaches, network failures, computer viruses and operator negligence. Should one of these systems fail or be inadequate to support future growth, our results could be materially and adversely impacted. We are also dependent on certain vendors of our key information systems. Should these vendors experience financial difficulties, the support of these key systems could be negatively impacted.

Disruptions at our distribution center, including potential labor disputes and work stoppages, could significantly increase our distribution costs and therefore adversely affect our financial performance.

We conduct the majority of our distribution operations and a significant portion of our direct marketing processing functions from our facility in Mexico, Missouri. A disruption in operations at the distribution center may significantly increase our distribution costs and prevent goods from flowing to stores and customers. We use third-party carriers for our product shipments. The distribution of products is vulnerable to disruption from employee strikes and labor unrest, in particular, potential strikes by UPS employees and/or longshoremen, which could increase costs and impede or restrict the supply of goods.

The success of our direct marketing operations are dependent on various factors, including the receipt of adequate customer response to mailings and rising paper and postal rates.

The success of our catalog operation hinges on the achievement of adequate response rates to mailings, merchandising and catalog presentation that appeal to mail order customers and the expansion of the potential customer base in a cost-effective manner. Lack of consumer response to particular catalog mailings could increase the costs and decrease the profitability of the direct marketing segment. Significant costs relative to paper, postage and inventory are associated with the direct marketing segment. Rising paper and postal rates can negatively impact the business and the failure to accurately predict consumer response or to achieve the optimum cost-effective level of catalog circulation could adversely affect revenues and growth of the business. In addition, terrorism perpetrated via the U.S. mail or threats thereof could have a material adverse impact on our catalog business.

Because we depend on a core group of significant vendors, our operating results may be adversely affected by the loss of these key vendors or if these key vendors are unable to continue to fill our orders for their products.

Because we strive to sell only unique merchandise, adequate substitutes for certain key products may not be widely available in the marketplace. There can be no assurance that vendor manufacturing or distribution problems, or the loss of our exclusive rights to distribute important products, would not have a material adverse effect on our performance. In Fiscal 2005, we had one vendor who supplied products representing approximately 16% of net sales, with our 10 largest vendors representing approximately 41% of net sales. Our operating results could be adversely affected if any of our 10 largest vendors were unable to continue to fill our orders for such vendor’s products or failed to fill those orders in a timely way.

Our dependence on foreign vendors subjects us to possible delays in receipt of merchandise and to the risks involved in foreign operations.

We are purchasing an increasing portion of our merchandise from foreign vendors, including, but not limited to, Asia. Although we expect this strategy to increase profit margins for these products, our reliance on such vendors subjects us to associated legal, social, political and economic risks, including, but not limited to, import,

31

licensing and trade restrictions. In particular, economic relations between the United States and China have historically had a potential for volatility, the recurrence of which could have a material adverse impact on our operations and results. There is increasing political pressure on China to permit the exchange rate of its currency, the Chinese Yuan (“CNY”), to float against the U.S. Dollar (“USD”). Although substantially all of our supply contracts in China are denominated in USD, our suppliers could attempt to renegotiate these contracts and increase costs to us if the CNY/USD exchange rate were to change. We are also subject to the risk that the manufacturers abroad who ultimately manufacture our products may employ labor practices that are not consistent with acceptable practices in the United States. In any such event, we could be hurt by negative publicity with respect to those practices and, in some cases, face liability for those practices.

Additionally, we are highly dependent upon steamship lines and air cargo companies to transport this merchandise from overseas to the United States and as such, we remain vulnerable to equipment shortages and labor stoppage, as well as terror alerts and acts of terrorism, both at the ports and countries of origins and in the United States. In such a situation, we could face inventory shortages in certain products, increased transportation costs and increased interest expense as a result of moving inventory receipts forward.

The expansion of our business into international markets would expose us to certain risks.

We intend to expand the Brookstone concept into Asia and may also expand into other international markets. We cannot assure you that we will maintain significant operations internationally or that any such operations will be successful. Any international operations we establish will be subject to risks similar to those affecting our existing operations in the United States in addition to a number of other risks, including:

• political and economic instability in foreign markets;

• inconsistent product regulation by foreign agencies or governments;

• imposition of product tariffs and burdens;

• cost of complying with a wide variety of international and U.S. export laws and regulatory requirements;

• foreign currency fluctuations;

• difficulty in enforcing intellectual property rights; and

• language and other cultural barriers.

We currently do not plan to acquire political risk insurance in the countries in which we will conduct business. While we will carefully consider the risks in countries where we are evaluating investment opportunities, we cannot assure you that we will not be materially adversely affected as a result of such risks.

Interruptions in deliveries of raw materials and/or increased prices for raw materials used in our products could adversely affect our profitability, margins and revenues.

The raw materials used to manufacture the products we sell and our distribution and labor costs are subject to availability constraints and price volatility, which could result in increased costs. The raw materials used to manufacture the products we sell are subject to availability constraints and price volatility caused by high demand for such products and their components, currency fluctuations, factory capacity, competition for suppliers and factories, weather, supply conditions, government regulations, economic climate and other unpredictable factors. In addition, our transportation and labor costs are subject to price volatility caused by the price of oil, supply of labor, governmental regulations, economic climate, currency fluctuations and other unpredictable factors. Increases in demand for, or the price of, raw materials, distribution services and labor could have a material adverse effect on our business, financial condition and results of operations. Since we rely significantly on foreign sources of raw materials and production, we are at risk from a variety of factors that could leave us with inadequate or excess inventories, resulting in decreased profits or losses.

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Increases in petroleum prices may increase our transportation and shipping costs and the costs of certain of our products, which could lead to a decrease in sales.

In recent years, increases in petroleum prices have resulted in increased transportation and shipping costs for our Company. Further increases in petroleum prices such as those recently experienced as a result of Hurricane Katrina, or failure of such prices to decline, could continue to increase our costs for transportation and shipping and also could cause increases in the cost of goods that are manufactured from plastics and other petroleum-based products. In addition, increased petroleum prices may lead to increased airfares, which could cause a decrease in sales.

Fluctuating exchange rates could adversely affect our profitability and revenues.

We conduct a substantial part of our business in the U.S., and therefore our profitability and revenues may be adversely affected by fluctuating exchange rates. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. We cannot assure you that currency exchange rate fluctuations will not adversely affect our results of operations and financial condition.

Government regulation and other uncertainties relating to the internet and online commerce could negatively impact our internet business.

As a greater proportion of our sales are made via the internet, and as we begin to look more to that channel to increase overall sales, we will become increasingly subject to the uncertainties inherent in the developing area of e-commerce. Such uncertainties include, but are not limited to, the extent to which our customers will adopt the internet as their method of purchase, the effect that government regulation of the internet (or lack thereof) will have on the internet as a medium of commerce, as well as the reliability, stability and security of the internet and World Wide Web.

Health epidemics, terror alerts, terrorist attacks and other acts of violence or war may adversely affect our sales.

The United States Federal Government terror alerts have a negative effect on retail sales as they cause a disruption of consumer shopping patterns. Our stores are located predominantly in large public areas such as malls and airports, which experience a significant decrease in traffic during periods of high alert. Our stores are dependent on pedestrian traffic for sales volume. Terror alerts and acts of terrorism that affect such traffic could have a materially adverse impact on sales. Terror alerts related to acts of terrorism perpetrated via the U.S. mail could also have a material adverse impact on our catalog business.

A significant portion of our sales is generated at our airport store locations. Additionally, we market a wide range of products attractive to the traveling public. A decrease in traffic due to war, terrorism, health epidemics, cost increases to the consumer, or the consolidation of the airline industry caused by merger and bankruptcy and the consequent reduction of flights and available destinations could negatively affect the volume of business at our airport store locations and could depress the sales of travel-related merchandise.

The outbreak of unexpected disease threats such as severe acute respiratory syndrome (SARS), influenza, avian flu, and insect-borne diseases such as encephalitis and the West Nile virus could negatively impact our sales. Travel restrictions to certain parts of the world could impair our activities with some of our vendors that could result in product shortages and could slow new product development. Additionally, any reduction in travel could depress sales at our airport locations and reduce sales of our travel-related merchandise. Fear of contagion could cause a drop in traffic at all of our store locations with a consequent drop in sales.

Extreme weather conditions may negatively impact our business, financial condition and results of operations.

Extreme weather conditions in regions in which we source our products or the areas in which our stores are located could have a material adverse effect on our business, financial condition and results of operations. Major international catastrophes such as tsunamis, hurricanes and earthquakes could adversely affect our business in a number of ways, including but not limited to, store closures, reduced sales, performance delays, product shortages and increased costs, all of which are beyond our control and cannot be anticipated. For example, Hurricane Katrina forced us to close five of our stores. Also, heavy snowfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores. Our business is also susceptible to

33

unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions could adversely affect our business, financial condition and results of operations.

Our Sponsors’ interests may conflict with the interests of other securityholders of the Company.

The Sponsors and their affiliates and designees indirectly collectively beneficially own approximately 93.5% of our outstanding voting securities. As a result, our Sponsors are collectively in a position to control all matters affecting us, including decisions regarding extraordinary business transactions, fundamental corporate transactions, appointment of members to our management, election of directors and our corporate and management policies.

The interests of our Sponsors could conflict with the interests of other securityholders of the Company. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our Sponsors might conflict with the interests of other securityholders of the Company. Our Sponsors may also have an interest in pursuing acquisitions, divestitures, financings or other transactions, including dividend payments to the holders of our equity that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to other securityholders of the Company.

Our substantial indebtedness could adversely affect our financial health.

We currently have a significant amount of indebtedness. As of July 1, 2006, we had total indebtedness of $190.6 million (of which $183.0 million consisted of the senior secured notes, net of discount on the notes of $2.0 million, and the balance consisted of other debt).

Our substantial indebtedness could have important consequences to our investors. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to the senior secured notes;

• increase our vulnerability to general adverse economic and industry conditions;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

• place us at a competitive disadvantage compared to our competitors that have less debt; and

• limit our ability to borrow additional funds.

In addition, the indenture for the senior secured notes and our new senior secured credit facility contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures and research and development efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

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Based on our current level of operations and anticipated cost savings and operating improvements, we believe our cash flow from operations, available cash and available borrowings under our new senior secured credit facility, will be adequate to meet our future liquidity needs at least until the maturity date of our new senior secured credit facility.

We cannot assure you, however, that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us under our new senior secured credit facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our new senior secured credit facility and the senior secured notes, on commercially reasonable terms or at all.

We are not required to evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, which may lead to our investors losing confidence in our reported financial information.

As a result of becoming a privately held company upon the consummation of the Transaction, we are not subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of a reporting company to annually review, assess and disclose the effectiveness of a company’s internal controls over financial reporting and to obtain a report by the reporting company’s independent auditors addressing such assessments. To the extent that we do make the assessments and disclosures as to our internal controls over financial reporting provided for by Section 404 of the Sarbanes-Oxley Act of 2002, investors may lose confidence in the accuracy of our reported financial information, which may negatively impact the trading price of the senior secured notes.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

ITEM 3. Defaults Upon Senior Securities.

None.

ITEM 4. Submission of Matters to a Vote of Security Holders.

None.

ITEM 5. Other Information.

None.

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ITEM 6. Exhibits.

10.1	Employment Agreement, dated as of June 9, 2006, among William Ellis, and Brookstone Company, Inc. (filed herewith)
10.2	Employment Agreement, dated as of June 29, 2006, among George Sutherland, and Brookstone Company, Inc. (filed herewith)
10.3	Separation Agreement and General Release, among Michael F. Anthony and Brookstone, Inc. (filed herewith)
31.1	Certification of Principal Executive Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)
31.2	Certification of Principal Financial Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)
32.1	Certification of Chief Executive Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2	Certification of Chief Financial Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
99.1	Excerpt of Item 7A from the Company’s Fiscal 2005 Annual Report (filed herewith)

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Brookstone, Inc.
	(Registrant)
	/s/ Philip W. Roizin
August 15, 2006	(Signature)
	Philip W. Roizin
	Executive Vice President Finance and Administration,
	Treasurer and Secretary
	(Principal Financial Officer
	and duly authorized to sign on behalf of the Company)

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Exhibit Index

Exhibit Number	Exhibit
10.1	Employment Agreement, dated as of June 9, 2006, among William Ellis, and Brookstone Company, Inc. (filed herewith)
10.2	Employment Agreement, dated as of June 29, 2006, among George Sutherland, and Brookstone Company, Inc. (filed herewith)
10.3	Separation Agreement and General Release, among Michael F. Anthony and Brookstone, Inc. (filed herewith)
31.1	Certification of Principal Executive Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)
31.2	Certification of Principal Financial Officer in the Form Provided by Rule 15d-14 of the Securities Exchange Act of 1934 (filed herewith)
32.1	Certification of Chief Executive Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2	Certification of Chief Financial Officer in the Form Provided by Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
99.1	Excerpt of Item 7A from the Company’s Fiscal 2005 Annual Report (filed herewith)

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EX-10.1

Exhibit 10.1

June 9, 2006

William Ellis

176 Paramount Dr

Sedona, AZ 86336-6678

Dear Bill,

The Brookstone Company and I are extremely pleased to offer you the position of Vice President of Business Development, pursuant to an Employment Agreement being developed. There are many exciting challenges ahead and we look forward to both a mutually productive and an enjoyable relationship. As reviewed, here are the details of the offer we are extending to you:

• You are joining Brookstone as Vice President of Business Development, reporting directly to Louis Mancini, President and Chief Executive Officer.

• Your start date will be in June 2006.

• Your base salary will be $3,577 per week ($186,000.00 annualized).

• You will participate in our Management Incentive Bonus (MIB) program as outlined in your Employment Agreement. The Bonus will be based upon overall Corporate EBITDA and Sales results.

• You will be granted a Class B Interest Award as outlined in the Restricted Interest Award Agreements.

• Brookstone will bear the reasonable cost of temporary housing accommodations for you and your family for a period of 90 days.

William Ellis, page 2.

• Brookstone will pay for two house-hunting trips to New Hampshire or Massachusetts for you and your spouse/partner.

• When you relocate, Brookstone will bear the reasonable cost of packing and moving your household. Storage of household goods is at the Associates’ expense. We will supply you with the names of two companies to give you estimates.

• Brookstone will reimburse you for usual closing costs and legal expenses involved in purchasing your new home in New Hampshire or Massachusetts, including up to two mortgage points.

• Brookstone does not pay real estate fees for either the selling of your old home or purchase of your new home.

• The maximum amount that Brookstone will pay toward your relocation is $35,000; this includes temporary housing, the physical move of your household goods and the legal expenses and closing costs on your new home. During your new Associate orientation, you will be asked to sign a “Relocation Expense Payment Agreement.”

• Once you purchase a new home the Company will:

a) During the 1^st six months after the purchase of your new home, pay 100% of property taxes, homeowners insurance, and interest payments on your home in Arizona if it has not been sold.

b) During the next six months (months 7-12) pay 75% of property taxes, homeowners insurance, and interest payments on your home in Arizona if it has not been sold.

c) There will be no further reimbursement if your home in Arizona is not sold within 12 months after the purchase of your new home.

William Ellis, page 3.

• You will receive incidental pay for one week when you move into your new home. Please advise the VP of Human Resources when this takes place.

• You are eligible to receive a car allowance of $500.00 per month towards a leased or purchased automobile. Brookstone will pay for insurance, registration, maintenance, repairs, and all gas expenses related to company business

• You, like all Company executives, will be required to sign a Confidentiality Agreement and a release authorizing Brookstone to conduct a background check.

• You will become eligible for coverage under the medical plan following 30 days of employment. Single coverage costs $20.14 per week, two-person coverage $36.26 per week, and family coverage is $54.39 per week.

• You will become eligible for coverage under the dental plan, following 30 days of employment. Single coverage costs $6.49 per month, two person coverage $11.69 per month, and family coverage is $17.53 per month.

• You are eligible to participate in our Flexible Spending Dependent Care and Unreimbursed Medical Accounts following 30 days of employment.

• As a Salaried Associate, you are eligible for group term life insurance which pays a benefit equal to 200% of your annual base earnings (up to $650k), double indemnity, upon employment. Brookstone pays the premium for this policy.

• You will become eligible for Short Term Disability plan benefits upon employment. You will become eligible for Long Term Disability insurance coverage the first of the month after 30 days of employment. Brookstone pays the premium for this policy.

William Ellis, page 4.

• You will become eligible for enrollment in the Company’s 401(k) after 90 days continuous service.

On an annual basis, Brookstone matches 100% of the first 2% of a participant’s compensation contributed to the 401(k) plan. You will be eligible to accrue a matching contribution after completing one year of service. Once paid, you are immediately vested in any matching contribution.

• Immediately upon your date of hire you are eligible to receive a 30% discount off of the retail price of Brookstone merchandise.

• Based on your date of hire, you are eligible for 2 weeks of vacation in 2006.

What is presented in this letter is only a summary; the actual provisions of each benefit plan or insurance policy will govern if there is any discrepancy. If anything here is inconsistent with any federal, state, or local laws, Brookstone will comply with its obligations under such laws.

Kindly indicate your acknowledgment and acceptance of the terms of this letter by signing the enclosed copy on the space provided. Please keep one copy for your records and return the signed copy to this office.

Sincerely,

Louis Mancini

President & CEO

  William Ellis   Date

EX-10.2

Exhibit 10.2

June 29, 2006

George Sutherland

24415 Curt Dr

Brownstown MI 48183

Dear George,

The Brookstone Company and I are extremely pleased to offer you the position of Executive Vice President of Store Operations, pursuant to an Employment Agreement being developed. There are many exciting challenges ahead and we look forward to both a mutually productive and an enjoyable relationship. As reviewed, here are the details of the offer we are extending to you:

• You are joining Brookstone as Executive Vice President of Store Operations, reporting directly to Louis Mancini, President and Chief Executive Officer.

• Your start date will be in July 2006.

• Your base salary will be $4,327 per week ($225,000.00 annualized).

• You will participate in our Management Incentive Bonus (MIB) program as outlined in your Employment Agreement. The Bonus will be based upon overall Corporate EBITDA and Sales results.

• You will be granted a Class B Interest Award as outlined in the Restricted Interest Award Agreements.

• Brookstone will bear the reasonable cost of temporary housing accommodations for you and your family for a period of 90 days.

George Sutherland, page 2.

• Brookstone will pay for two house-hunting trips to New Hampshire or Massachusetts for you and your spouse/partner.

• When you relocate, Brookstone will bear the reasonable cost of packing and moving your household. Storage of household goods is at the Associates’ expense. We will supply you with the names of two companies to give you estimates.

• Brookstone will reimburse you for usual closing costs and legal expenses involved in purchasing your new home in New Hampshire or Massachusetts, including up to two mortgage points.

• Brookstone does not pay real estate fees for either the selling of your old home or purchase of your new home.

• The maximum amount that Brookstone will pay toward your relocation is $60,000; this includes temporary housing, the physical move of your household goods and the legal expenses and closing costs on your new home. Any remaining balance will be paid out to you in a lump sum. During your new Associate orientation, you will be asked to sign a “Relocation Expense Payment Agreement.”

• Once you purchase a new home the Company will:

a) During the 1^st six months after the purchase of your new home, pay 100% of property taxes, homeowners insurance, and interest payments on your home in Michigan if it has not been sold.

b) During the next six months (months 7-12) pay 75% of property taxes, homeowners insurance, and interest payments on your home in Michigan if it has not been sold.

c) There will be no further reimbursement if your home in Michigan is not sold within 12 months after the purchase of your new home.

George Sutherland, page 3.

• You will receive incidental pay for one week when you move into your new home. Please advise the VP of Human Resources when this takes place.

• You are eligible to receive a car allowance of $500.00 per month towards a leased or purchased automobile. Brookstone will pay for insurance, registration, maintenance, repairs, and all gas expenses related to company business

• You, like all Company executives, will be required to sign a Confidentiality Agreement and a release authorizing Brookstone to conduct a background check.

• You will become eligible for coverage under the medical plan following 30 days of employment. Single coverage costs $20.14 per week, two-person coverage $36.26 per week, and family coverage is $54.39 per week.

• You will become eligible for coverage under the dental plan, following 30 days of employment. Single coverage costs $6.49 per month, two person coverage $11.69 per month, and family coverage is $17.53 per month.

• You are eligible to participate in our Flexible Spending Dependent Care and Unreimbursed Medical Accounts following 30 days of employment.

• As a Salaried Associate, you are eligible for group term life insurance which pays a benefit equal to 200% of your annual base earnings (up to $650k), double indemnity, upon employment. Brookstone pays the premium for this policy.

• You will become eligible for Short Term Disability plan benefits upon employment. You will become eligible for Long Term Disability insurance coverage the first of the month after 30 days of employment. Brookstone pays the premium for this policy.

George Sutherland, page 4.

• You will become eligible for enrollment in the Company’s 401(k) after 90 days continuous service.

On an annual basis, Brookstone matches 100% of the first 2% of a participant’s compensation contributed to the 401(k) plan. You will be eligible to accrue a matching contribution after completing one year of service. Once paid, you are immediately vested in any matching contribution.

• Immediately upon your date of hire you are eligible to receive a 30% discount off of the retail price of Brookstone merchandise.

• Based on your date of hire, you are eligible for 2 weeks of vacation in 2006.

What is presented in this letter is only a summary; the actual provisions of each benefit plan or insurance policy will govern if there is any discrepancy. If anything here is inconsistent with any federal, state, or local laws, Brookstone will comply with its obligations under such laws.

Kindly indicate your acknowledgment and acceptance of the terms of this letter by signing the enclosed copy on the space provided. Please keep one copy for your records and return the signed copy to this office.

Sincerely,

Louis Mancini

President & CEO

  George Sutherland   Date

EX-10.3

Exhibit 10.3

SEPARATION AGREEMENT AND GENERAL RELEASE

This Separation Agreement and General Release (the “Agreement”) is made and entered into as of the Effective Date of this Agreement (as set forth in Paragraph 18 hereof), by and between Michael F. Anthony (“Anthony”), and Brookstone, Inc. a Delaware corporation (the “Company”), on its own behalf and on behalf of each of its respective past and present parent, affiliate, and subsidiary entities;

WHEREAS, the Company and Anthony are parties to an Employment Agreement dated as of October 4, 2005 (“Employment Agreement”); and

WHEREAS, Anthony held the position of President and Chief Executive Officer of the Company and is a member of the Company’s Board of Directors(“Board”); and

WHEREAS, effective April 19, 2006 (“Resignation Date”), Anthony resigned his position as a member of the Company’s Board and as a member of the Board of Directors of each of the Company’s parent, subsidiary and affiliated entities (collectively the “Company Entities”); and

WHEREAS, pursuant to this Agreement, Anthony is deemed to have resigned his employment with the Company without Good Reason, pursuant to Section 7(d) of the Employment Agreement as of the Resignation Date, and all of his positions as an officer of any of the Company Entities terminated as of that date.

NOW, THEREFORE, for and in consideration of the mutual promises and covenants herein contained and for good and valuable consideration, the sufficiency of which is hereby acknowledged, the Company and Anthony (collectively, the “Parties,” each individually, a “Party”) hereby agree as follows:

Termination of the Employment Agreement.

The Parties agree that, except as expressly and specifically provided for herein, the Employment Agreement is terminated insofar as it may require the Company to make any further payments or to provide any further benefits to Anthony.

For avoidance of doubt, Sections 8 and 11 of the Employment Agreement shall remain in full force and effect and are incorporated into this Agreement by reference. A copy of Sections 8 and 11 (“Restrictive Covenants”) are attached hereto as Exhibit A. Section references in Exhibit A are to the Employment Agreement.

Termination of Employment and Positions. Anthony acknowledges that, effective April 19, 2006, his employment and any and all positions he held with the Company and any of the other Company Entities (including as a member of the Board of Directors and as an Officer) terminated, and as of that date he relinquished any and all of his authorities with each of those companies. Anthony agrees that as of the Resignation Date, notwithstanding anything contained in the Employment Agreement to the contrary, his right to receive his Base Salary terminated. The Company agrees that it shall arrange for Anthony’s Company sponsored medical and dental benefits to continue, to the maximum extent permissible under the Company’s benefits plans, until October 4, 2008, provided, however, that the Company shall be

entitled to amend or terminate any plans which are applicable generally to the Company’s senior executives, officers or other employees. Notwithstanding the foregoing, if during the period in which benefits continue pursuant to the preceding sentence, Anthony accepts other employment and becomes eligible for alternative benefits, the continuation of his medical and dental coverage hereunder shall immediately cease. For avoidance of doubt, there shall be no termination of his medical and dental benefits under this provision merely based on his serving as a member of the board of directors of one or more entities.

Anthony’s Securities in the Company Entities.

OSIM Brookstone Holdings, L.P. (“OBH LP”) is hereby exercising its rights under the Second Amended and Restated Limited Partnership Agreement of OBH LP (the “Partnership Agreement”), dated as of October 4, 2005, among OSIM Brookstone Holdings, Inc. (“OBH GP”) and each of the limited partners of OBH LP, to repurchase the 456,266 Class A Common Limited Partnership Interests of OBH LP (the “Class A Interests”) and the 17,000 Class B Common Limited Partnership Interests of OBH LP (the “Make-Up Class B Interests”, and collectively with the Class A Interests, the “OBH LP Interests”) held by him. Subject to the terms and conditions set forth in this Agreement, Anthony hereby agrees to sell to OBH LP, and OBH LP hereby agrees to purchase and accept from Anthony on the date hereof, Anthony’s right, title and interest in and to the OBH LP Interests in exchange for 3419.97 shares of common stock, par value $0.01 per share, of Brookstone Holdings Corp. (the “Pass-Through Common Stock”), and Anthony hereby agrees to sell to Brookstone Holdings Corp., and Brookstone Holdings Corp. hereby agrees to purchase and accept from Anthony, the Pass-Through Common Stock on the first day after the date hereof, for a total purchase price equal to Four Million Five Hundred Sixty Two Thousand Six Hundred Sixty One Dollars ($4,562,661.00), which Anthony agrees shall, notwithstanding anything to the contrary contained in the Partnership Agreement, be payable (without interest) in three equal installments by wire transfer of immediately available funds in accordance with wire transfer instructions set forth on the signature pages hereto, as follows: the first installment shall be paid seven (7) days after the date hereof, the second installment shall be paid on January 2, 2007 and the third installment shall be paid on July 2, 2007. For the avoidance of doubt, Anthony and OBH LP hereby acknowledge and agree that the Call Price and the Cost Price (each, as defined in the Partnership Agreement) of the Make-Up Class B Interests is zero.

In accordance with Section 9.1(c) of the Partnership Agreement and Section 2.1 of the Shareholders Agreement, dated as of October 4, 2005, among OBH GP and each of the shareholders of OBH GP, Anthony agrees to transfer to OBH GP the 456,266 ordinary shares in the capital of OBH GP held by him (the “OBH GP Shares”) for no additional consideration, simultaneously with the repurchase by OBH LP of the OBH LP Interests on the date hereof;

Anthony agrees to execute and deliver to the applicable party a written assignment, the form of which is attached hereto as Exhibit B, with respect to each of the (i) OBH LP Interests, (ii) OBH GP Shares and (iii) Pass-Through Common Stock.

The OBH LP Interests and the OBH GP Shares held by Anthony are owned of record and beneficially by Anthony and represent all of the equity interests held by Anthony and his direct and indirect Permitted Transferees (as defined in the Partnership Agreement) in the Applicable Entities (as defined in the Partnership Agreement), and Anthony has good and marketable title to the OBH LP Interests and the OBH GP Shares, free and clear of any Liens (as defined in the Partnership Agreement) and the execution by Anthony of this Agreement shall not result in the imposition of any Lien upon the OBH LP Interests, the OBH GP Shares or the Pass-Through Common Stock. Anthony agrees that, upon his receipt of the Pass-Through Common Stock, he will not transfer any of the Pass-Through Common Stock other than to Brookstone Holdings Corp. in accordance with Section (a) above.

Anthony and OBH LP agree that the execution of this Agreement shall be deemed to satisfy all requirements with respect to the delivery of a Call Notice under the Partnership Agreement and, notwithstanding the provisions contained in Section 9.6 of the Partnership Agreement, the closing of the purchase of Anthony’s OBH LP Interests, OBH GP Shares and Pass-Through Common Stock shall take place on the date hereof and the first day hereafter, as provided herein.

Anthony acknowledges and agrees that in accordance with the terms of the Restricted Interest Award Agreement (Time Vested) and the Restricted Interest Award Agreement (IRR Vested), each dated as of October 4, 2005, between OBH LP and Anthony, all Restricted IRR Interests and Restricted Time Interests (as defined in such award agreements) were automatically forfeited by him upon the Termination Date.

OBH LP and the Company represent and warrant that (A)this Agreement and each instrument executed and to be executed by any of the Company Entities in connection herewith constitute the legal, valid and binding obligations of the applicable Company Entity, enforceable against it in accordance with their respective terms, except as limited by bankruptcy, insolvency or other Laws affecting generally the enforcement of creditors’ rights and doctrines of equity relating to the availability of specific performance as a remedy, and (B) the execution and delivery of this Agreement and each instrument executed and to be executed by a Company Entity in connection herewith, the consummation of the transactions contemplated herein, and the performance of, fulfillment of and compliance with the terms and conditions hereof and thereof by the Company Entities does not and will not: (i) conflict with or result in a breach of the organizational documents of any Company Entity, including any amendments and modifications thereto; or (ii) violate or conflict with or constitute a default under any agreement, instrument or writing of any nature to which any Company Entity is a party or by which any Company Entity or its assets or properties may be bound, which violation, conflict or default would have a material adverse effect on any Company Entity’s ability to consummate the transactions contemplated hereby.

Anthony and OBH LP agree to treat the above repurchase of the OBH LP Interests by OBH LP as a distribution to Anthony under Section 731 of the Internal Revenue Code of 1986, as amended (the “Code”) and that all income tax returns, reports and IRS forms filed by them shall be prepared consistently with such treatment. Anthony and Brookstone Holdings Corp. agree to treat the above sale of the Pass-Through Common Stock by Anthony to Brookstone Holdings Corp. as a complete redemption of Anthony’s interest in Brookstone Holdings Corp. under Section 302(b)(3) of the Code for all income tax purposes and that all income tax returns, reports and IRS forms filed by them shall be prepared consistently with such treatment.

SERP. As provided in Section 6.2 of the Company’s Defined Contribution Supplemental Retirement Plan (the “SERP”), and pursuant to Anthony’s election to change the Installment Period (as defined in the SERP), Anthony’s Supplemental Retirement Benefit shall be payable to him in cash in five (5) substantially equal annual installments commencing on June 30, 2007. The amount of each such installment shall be equal to the amount of Anthony’s Account (as defined in the SERP) on the payment date divided by the number of installments remaining, and shall be payable in accordance with and subject to the terms and conditions of the SERP. Each such installment payment shall reduce the balance of Anthony’s Account thereunder by an equivalent amount. Anthony shall be entitled to all rights provided to him in accordance with the terms of the SERP as it relates to such Account.

Purpose of the Agreement. The Company is providing and Anthony is accepting this Agreement, in full and complete satisfaction of all of Anthony’s Claims (as defined herein) against the Company, the Company Entities, Brookstone Holdings Corp., Brookstone Acquisition Corp., OBH LP, J.W. Childs Associates, L.P., and any and all of their respective parent, subsidiary and/or affiliate corporations, affiliated persons or partnerships, successors and assigns, and any and all of their past and present directors, officers, shareholders, consultants, agents, representatives, attorneys, employees, members, employee benefit plans and plan fiduciaries (collectively, the “Releasees”). Anthony further acknowledges (i) the sufficiency of the consideration for this Agreement generally and specifically for the release of any such Anthony’s Claims, he may have ever had, may now have or may hereafter assert against any of the Releasees based on acts or omissions occurring prior to the Effective Date hereof, including but not limited to, those claims arising under or related to Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, as amended by, inter alia, the Older Workers Benefit Protection Act of 1990, and the Americans with Disabilities Act of 1990; and (ii) that no other monies or other consideration, except as expressly set forth in this Agreement, are due and owing to him or on his behalf by the Company or any of the other Releasees.

No Admissions. This Agreement does not constitute an admission by Anthony or the Company or any of the other Releasees of any violation of any contract or of any statutory, constitutional or common law of any federal, state or local government of the United States or of any other country or political subdivision thereof, and Anthony, the Company and each of the other Releasees expressly deny any such violation or liability. This Agreement may not be introduced in any action or proceeding by anyone for any purpose except to evidence its terms.

General Release by Anthony.

In consideration of this Agreement and the monies and other good and valuable consideration provided to Anthony pursuant to this Agreement, Anthony hereby irrevocably and unconditionally releases, waives and forever discharges the Company and each of the other Releasees, from any and all actions, causes of action, claims, demands, damages, rights, remedies and liabilities of whatsoever kind or character, in law or equity, suspected or unsuspected, past or present, that he has ever had, may now have, or may later assert against the Company or the other Releasees based on acts or omissions occurring prior to the Effective Date hereof, whether or not arising out of or related to Anthony’s employment by or the performance of any services (including as a member of the Board of Directors) to or on behalf of the Company and/or the Company Entities or the termination of that employment and those services (hereinafter referred to as “Anthony’s Claims”), from the beginning of time to the Effective Date hereof (as set forth in Paragraph 17), including without limitation: (i) any claims arising out of or related to any federal, state and/or local labor or civil rights laws including, without limitation, the federal Civil Rights Acts of 1866, 1871, 1964 and 1991, the Age Discrimination in Employment Act of 1967, as amended by, inter alia, the Older Workers Benefit Protection Act of 1990, the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, the Family and Medical Leave Act of 1993, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act of 1938, the New Hampshire wage and hour laws, and the New Hampshire anti-discrimination statutes, as each may have been amended from time to time; (ii) any and all other of Anthony’s Claims arising out of or related to any and all other federal, state or local constitutions, statutes, rules or regulations, (iii) any claims arising out of any contract, agreement or understanding, including but not limited to the Employment Agreement, the Merger Agreement, (dated as of April 15, 2005), and the Reinvestment Agreement, the Restricted Award Agreement, the Second Amended and Restated Partnership Agreement of OBH LP, and the Shareholders Agreement, (collectively the “Equity Agreements”) (each dated as of October 4, 2005, and as described more fully in the Employment

Agreement), or (iv) any claims arising under any common law right of any kind whatsoever, including, without limitation, any of Anthony’s Claims for any kind of tortious conduct, promissory or equitable estoppel, breach of the Company’s policies, rules, regulations, handbooks or manuals, breach of implied contract or covenants of good faith, wrongful discharge or dismissal, and/or failure to pay in whole or part any compensation, bonus, incentive compensation, stock bonus or options, stock, overtime compensation, severance pay or benefits of any kind whatsoever, including disability and medical benefits, back pay, front pay or any compensatory, special or consequential damages, punitive or liquidated damages, attorneys’ fees, costs, disbursements or expenses. Notwithstanding the foregoing, this Agreement shall not affect any rights of Anthony, (A) to indemnification, if any, under any director and officer liability insurance that covered Anthony, any applicable indemnification agreement or any indemnification rights provided under the Company’s articles of incorporation, by-laws, resolutions; (B) to enforce the terms of this Agreement; or (c) payments under the SERP as provided under Section 4 hereof.

To the fullest extent permitted by law, Anthony agrees not to lodge any formal or informal complaint in court, with any federal, state or local agency or any other forum, including without limitation arbitration, in any jurisdiction, arising out of or related to Anthony’s Claims. Anthony hereby represents and warrants that he has brought no complaint, claim, charge, action or proceeding against any of the Releasees in any jurisdiction or forum. Anthony further represents, warrants and agrees that he has not in the past and will not in the future assign any of Anthony’s Claims to any person, corporation or other entity.

Execution of this Agreement by Anthony operates as a complete bar and defense against any and all of Anthony’s Claims against the Company and/or the other Releasees. If Anthony should hereafter make any of Anthony’s Claims in any charge, complaint, action, claim or proceeding seeking damages against the Company or any of the other Releasees, the Agreement may be raised as and shall constitute a complete bar to any such action, claim or proceeding and the Company and/or the other Releasees shall be entitled to and shall recover from Anthony all costs incurred, including reasonable attorneys’ fees, in defending against any such charge, complaint, action, claim or proceeding.

General Release by Company.

In consideration of this Agreement, the Company hereby irrevocably and unconditionally releases, waives and forever discharges Anthony, from any and all actions, causes of action, claims, demands, damages, rights, remedies and liabilities of whatsoever kind or character, in law or equity, suspected or unsuspected, past or present, that it has ever had, may now have, or may later assert against Anthony based on acts or omissions occurring prior to the Effective Date hereof, whether or not arising out of or related to Anthony’s employment by or the performance of any services to or on behalf of the Company or the termination of that employment and those services, from the beginning of time to the Effective Date (hereinafter referred to as “Company’s Claims”), including without limitation, any and all other Company’s Claims arising out of or related to any contract, any and all federal, state or local constitutions, statutes, rules or regulations, or under the laws of any country or political subdivision, or under any common law right of any kind whatsoever, including, without limitation, any of the Company’s Claims for any kind of tortious conduct, promissory or equitable estoppel, breach of the Company’s policies, rules, regulations, handbooks or manuals, breach of express or implied contract or covenants of good faith, breach of duty of loyalty or fiduciary duty. Notwithstanding the foregoing, the Company’s Claims which are being released herein shall not include (A) any claims, causes of action, or rights, that the Company may have against Anthony, which arise from or be related to (i) any acts or omissions undertaken by Anthony, or undertaken at his direction, which constitute fraud, theft or

embezzlement, or any act that constitutes a felony under the laws of the United States or any state which materially damages the Company; or (ii) any intentional act of which no directors of OSIM Brookstone Holdings, Inc. are aware that was undertaken by Anthony in knowing and willful violation of a specific written Company directive or policy which materially damages the Company; or (iii) any indemnification agreement or provision binding upon Anthony or to which Anthony is a party; or (B) the Company’s right to enforce the terms of the Equity Agreements or this Agreement.

To the fullest extent permitted by law, the Company agrees not to lodge or assist any other person or entity in lodging any formal or informal complaint in court, with any federal, state or local agency or any other forum, in any jurisdiction, against Anthony arising out of or related to the Company’s Claims. The Company hereby represents and warrants that it has not brought any complaint, claim, charge, action or proceeding against Anthony in any jurisdiction or forum, not assisted or encouraged any other person in doing so. The Company further represents and warrants that it has not in the past and will not in the future assign any of the Company’s Claims to any person, corporation, or other entity.

Execution of this Agreement by the Company operates as a complete bar and defense against any and all of the Company’s Claims against Anthony. If the Company or any of the Company Entities should hereafter make any of the Company’s Claims in any charge, complaint, action, claim or proceeding against Anthony, the Agreement may be raised as and shall constitute a complete bar to any such charge, complaint, action claim or proceeding and Anthony shall be entitled to and shall recover from the Company all costs incurred, including reasonable attorneys’ fees, in defending against any such charge, complaint, action, claim or proceeding.

Vacation Pay. The Company shall promptly pay Anthony such amounts due, in consideration of his accrued, but unpaid, vacation pay, as of the Resignation Date, in accordance with the Company’s vacation policy.

Business Expense Reimbursement. Anthony will promptly submit to the Company all outstanding business expenses incurred on or before the Resignation Date for reconciliation and payment in accordance with the Company’s policies.

Confidentiality. Anthony and the Company agree that this Agreement and its terms and conditions and any negotiations which concluded with this Agreement shall be kept and remain strictly confidential except to the extent that disclosure is required by law or regulations of any governmental authority, and, as to the Company only, in connection with the conduct of business by the Company, or, as to Anthony only, in connection with disclosure to his attorney, financial advisor and immediate family, provided, however, that Anthony shall cause his attorney, financial advisor and immediate family to keep such information in strictest confidence. Anthony represents and warrants that he has not, directly or indirectly, disclosed any Confidential Information or any information which he has agreed in this Paragraph 11 shall remain strictly confidential.

Return of Property. Anthony is obligated to surrender and acknowledges that he has surrendered or will surrender to the Company’s Chief Financial Officer on or before the Effective Date, all property of the Company and the other Releasees in whatever form retained (e.g., written, mechanical, electronic) including, but not limited to, all documents, memoranda, notes, papers, contracts, drafts, data, records, reports, plans, proposals, computer tapes, printouts, software and other information and property, in whatever form, including any copies thereof, that relate to the business of the Company Entities which are in the possession of or under the control of Anthony.

Agreement Enforceable. Nothing contained herein is intended to prevent Anthony or the Company from enforcing this Agreement.

Remedies for Breach. In the event that either Party breaches, violates, fails or refuses to comply with any of the provisions, terms or conditions or any of the warranties or representations of this Agreement (the “Breach”), the non-breaching Party shall recover against the breaching Party damages, including reasonable attorneys’ fees, accruing to the non-breaching Party as a consequence of the Breach. Regardless of and in addition to any right to damages the non-breaching Party may have, the Company shall be entitled to injunctive relief in connection with any breach of the Restrictive Covenants, subject to their terms, attached as Exhibit A, which are incorporated into this Agreement by reference.

No Reliance. Neither the Company nor Anthony is relying on any representations made by the other regarding this Agreement or the implications thereof.

Miscellaneous Provisions.

No oral understanding, statements, promises or inducements contrary to the terms of this Agreement exist. This Agreement cannot be changed or terminated orally but only by a signed writing by the Parties.

Should any provision of this Agreement be held invalid, illegal or unenforceable, it shall be deemed to be modified so that its purpose can lawfully be effectuated and the balance of this Agreement shall be enforceable and remain in full force and effect.

This Agreement shall extend to, be binding upon, and inure to the benefit of the Parties and their respective successors, heirs and assigns.

Any employment taxes payable as a result of this Agreement shall be the sole and exclusive responsibility of Anthony. Anthony acknowledges that the Company has given him no tax advice as to the appropriate tax treatment of the transactions described in this Agreement and that any taxes owing by Anthony are his sole responsibility. Anthony hereby agrees to hold harmless and indemnify the Company should it be determined by the IRS that any employment taxes (and any interest and penalties related thereto) are due with respect to the transactions described in this Agreement.

Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against either of the parties in the courts of the State of New Hampshire, or if it has or can acquire jurisdiction, in the United States District Court for the State of New Hampshire, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world, whether within or without the State of New Hampshire.

Amendment: Waiver. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument executed by the parties hereto or, in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later

time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.

This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.

Effective Date/Revocation. Anthony may revoke this Agreement in writing at any time during a period of seven (7) calendar days after the execution of this Agreement by both of the Parties (the “Revocation Period”). In the event of such a revocation, the Agreement shall not become effective and Anthony shall not be entitled to any of the consideration provided to him hereunder. Anthony shall provide a certificate of non-revocation to the Company on the last day of the Revocation Period and thereupon the Agreement shall become effective (the “Effective Date”).

Notices. Any notices or requests under this Agreement shall be in writing, addressed as follows:

If to Anthony:

Michael F. Anthony

64 Chestnut Hill Road

Amherst, NH 03031

Telephone No.: (603) 672-5217

Fax No.: (603) 672-5224

With a copy to:

Weil Gotshal & Manges, LLP

100 Federal Street, Floor 34

Boston, MA 02110

Fax: (617) 772-8333

Attn.: Steven M. Peck, Esq.

If to the Company:

c/o J.W. Childs Associates, Inc.

111 Huntington Avenue

Boston, Massachusetts 02199

Fax: (617) 753-1101

Attn: Adam L. Suttin

With a copy to:

Kaye Scholer LLP

425 Park Avenue

New York, New York 10022

Fax: (212) 836-8689

Attn.: Stephen C. Koval, Esq.

John D. Geelan, Esq.

In signing this Separation Agreement and General Release (the “Agreement”), Anthony acknowledges that:

He has read and understands this Agreement and he is hereby advised in writing to consult with an attorney prior to signing this Agreement;

He has signed this Agreement voluntarily and understands that this Agreement contains a full and final release of all of Anthony’s Claims;

He has been offered at least twenty-one (21) calendar days to consider this Agreement; and

This Agreement is not made in connection with an exit incentive or other employee termination program offered to a group or class of employees.

	Michael F. Anthony	Date of Execution by Mr. Anthony
	Wire Instructions:
	Bank:
	ABA #:
	Acct Name:
	Account #:
BROOKSTONE, INC.
By:
Name:		Date of Execution by Brookstone, Inc.
Title:

Solely with respect to Paragraph 3.

OSIM BROOKSTONE HOLDINGS, L.P.
	By: OSIM Brookstone Holdings, Inc.,
	its general partner
By:
Name:		Date of Execution by Brookstone Holdings, L.P.
Title:

Solely with respect to Paragraph 3.

BROOKSTONE HOLDINGS CORP.
By:
Name:	Date of Execution by Brookstone Holdings Corp.
Title:

EXHIBIT A

Anthony’s Post- Employment Restrictive Covenants

Section 8. Protection of Confidential Information; Non-Competition; Non-Solicitation; Non-Disparagement.

(a) Acknowledgment. The Executive agrees and acknowledges that in the course of rendering services to the Company and its clients and customers he has acquired and will acquire access to and become acquainted with confidential information about the professional, business and financial affairs of the Company, its subsidiaries and affiliates that is non-public, confidential or proprietary in nature. The Executive acknowledges that the Company is engaged in a highly competitive business and the success of the Company in the marketplace depends upon its good will and reputation. The Executive agrees and acknowledges that reasonable limits on his ability to engage in activities competitive with the Company are warranted to protect its substantial investment in developing and maintaining its status in the marketplace, reputation and goodwill. The Executive recognizes that in order to guard the legitimate interests of the Company, it is necessary for it to protect all confidential information. The existence of any claim or cause of action by the Executive against the Company shall not constitute and shall not be asserted as a defense to the enforcement by the Company of this Agreement. The Executive further agrees that his obligations of this Section 8 shall be absolute and unconditional.

(b) Confidential Information. During and at all times after the Term, the Executive shall keep secret all non-public information, matters and materials of the Company (including subsidiaries or affiliates), including, but not limited to, know-how, trade secrets, mail order and customer lists, vendor or supplier information, pricing policies, operational methods, any information relating to the Company’s (including any subsidiaries or affiliates) products or product development, processes, product specifications and formulations, artwork, designs, graphics, services, budgets, business and financial plans, marketing and sales plans and techniques, employee lists and other business, financial, commercial and technical information of the Company (including any subsidiaries and affiliates) (collectively, the “Confidential Information”), to which he has had or may have access and shall not use or disclose such Confidential Information to any person other than (i) the Company, its authorized employees and such other persons to whom the Executive has been instructed to make disclosure by the Board, in each case only to the extent required in the course of the Executive’s service to the Company or as otherwise expressly required in connection with court process, (ii) as may be required by law and then only after consultation with the Board to the extent possible or (iii) to the Executive’s personal advisors for purposes of enforcing or interpreting this Agreement, or to a court for the purpose of enforcing or interpreting this Agreement, and who in each case have been informed as to the confidential nature of such Confidential Information and, as to advisors, their obligation to keep such Confidential Information confidential. “Confidential Information” shall not include any information which is in the public domain during the period of service of the Executive, provided such information is not in the public domain as a consequence of disclosure by the Executive in violation of this Agreement or by any other party in violation of a confidentiality or non-disclosure agreement with the Company. Upon termination of his employment for any reason, the Executive shall deliver to the Company all documents, data, papers and records of any nature and in any medium (including, but not limited to, electronic media) in his possession or subject to his control that (x) belong to the Company or (y) contain or reflect any information concerning the Company, its subsidiaries and affiliates.

(c) Non-Competition. During the Term and thereafter for a period of equal to the longer of (i) twelve (12) months and (ii) the period following Executive’s termination of employment during which he is entitled to receive termination payments under Sections 7(a), (c) or (e) hereof (without consideration of whether the amount of such termination payments are reduced as a result of Executive’s acceptance of other employment), the Executive shall not, in any capacity, whether for his own account or on behalf of any other person or organization, directly or indirectly, with or without compensation, (A) own, operate, manage, or control, (B) serve as an officer, director, partner, member, employee, agent, consultant, advisor or developer or in any similar capacity to or (C) have any financial interest in, or assist anyone else in the conduct of the business of, the Sharper Image Corporation, Relax the Back, Hammacher Schlemmer or Discovery Channel Store (a “Specified Company”) or any company whose business substantially overlaps with the Company’s business; provided, however, that the Executive shall be permitted to own less than five percent (5%) of any class of publicly traded securities of any company (other than a Specified Company).

(d) Non-Solicitation. During the Term and for a period of twenty-four (24) months thereafter (the “Restrictive Period”), the Executive shall not, in any capacity, whether for his own account or on behalf of any other person or organization, directly or indirectly, with or without compensation, (i) solicit, divert or encourage any officers, directors or key employees of the Company (including any subsidiary or affiliate), to terminate his or her relationship with the Company (including any subsidiary or affiliate), or hire any such officer, director or key employee, (ii) solicit, divert or encourage any officers, directors or key employees of the Company (including any subsidiary or affiliate) to become officers, directors, employees, agents, consultants or representatives of another business, enterprise or entity, (iii) solicit, divert or appropriate any clients, vendors or distributors of the Company (including any subsidiary or affiliate), or (iv) influence or attempt to influence any of the clients, vendors, distributors or business partners of the Company (including any subsidiary or affiliate) to transfer his, her or its business or patronage from the Company to any Competitor of the Company. For purposes of this Section 8(d), a “Competitor” of the Company means any person or entity engaged in or which proposes to engage in the business of designing, licensing, manufacturing, marketing or distributing any products or services which are or would be competitive with any of the businesses of the OBH LP or any of its subsidiaries as then conducted or as any such businesses may be reasonably expected to be conducted in the future, or which otherwise competes with any product line of or service offered by OBH LP or any of its subsidiaries.

(e) Non-Disparagement. In consideration of the respective obligations of the parties hereunder, during the Term and during the Restrictive Period, (i) the Executive, on the one hand, and the Company, J.W. Childs Associates, L.P., OSIM International Ltd and Temasek Capital (Private) Limited and their respective affiliates (collectively, the “Investor Group”), on the other hand, shall not make any public statement (A) criticizing the other, or (B) impairing the goodwill or reputation of the other, and (ii) the Executive will be prohibited from making any statement (X) criticizing any products or services offered by any member of the Investor Group or (Y) impairing the goodwill or reputation of the Investor Group or of the Investor Group’s products or services, except to the extent required by law and then only after consultation with the applicable member of the Investor Group to the extent possible or as part of any legal proceeding before any governmental authority pertaining to any dispute between the Executive and any of the foregoing entities.

(f) Remedies for Breach. The Company and the Executive agree that the restrictive covenants contained in this Agreement are severable and separate, and the unenforceability of any specific covenant herein shall not affect the validity of any other covenant set forth herein. The Executive acknowledges that the Company will suffer irreparable harm as a result of a breach of such restrictive covenants by the Executive for which an adequate monetary remedy does not exist and a

remedy at law may prove to be inadequate. Accordingly, in the event of any actual or threatened breach by the Executive of any provision of this Agreement, the Company shall, in addition to any other remedies permitted by law, be entitled to obtain remedies in equity, including, but not limited to, specific performance, injunctive relief, a temporary restraining order, and/or a preliminary and/or permanent injunction in any court of competent jurisdiction, and to prevent or otherwise restrain a breach of this Section 8 without the necessity of proving damages or posting a bond or other security. Such relief shall be in addition to and not in substitution of any other remedies available to the Company. The existence of any claim or cause of action of the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of said covenants. The Executive shall not defend on the basis that there is an adequate remedy at law. In addition to and not in lieu of any other remedy that the Company may have under this Section 8 or otherwise, in the event of any breach of any provision of this Section 8 or Sections 10 or 11 during the period during which the Executive is entitled to receive payments and benefits pursuant to Section 7, which breach is not cured within fifteen days of notice thereof from the Company, such period shall be deemed to have terminated as of the date of such breach and the Executive shall not thereafter be entitled to receive any salary or other payments or benefits under this Agreement with respect to periods following such date.

(g) Modification. The parties agree and acknowledge that the duration, scope and geographic area of the covenants described in this Section 8 are fair, reasonable and necessary in order to protect the Confidential Information, goodwill and other legitimate interests of the Company and that adequate consideration has been received by the Executive for such obligations. The Executive further acknowledges that after termination of his employment with the Company for any reason, he will be able to earn a livelihood without violating the covenants described in this Section 8 and the Executive’s ability to earn a livelihood without violating such covenants is a material condition to his employment with the Company. If, however, for any reason any court of competent jurisdiction determines that the restrictions in this Section 8 are not reasonable, that consideration is inadequate or that the Executive has been prevented unlawfully from earning a livelihood, such restrictions shall be interpreted, modified or rewritten to include the maximum duration, scope and geographic area identified in this Section 8 as will render such restrictions valid and enforceable.

* * *

Section 11. Intellectual Property. All copyrights, trademarks, trade names, service marks and all ideas, inventions, discoveries, secret processes and methods and improvements, together with any and all patents that may be issued thereon, and all other intangible or intellectual property rights that may be invented, conceived, developed or enhanced by Executive during the term of his employment under this Agreement that relate to the business or operations of the Company or any subsidiary or affiliate thereof or that result from any work performed by the Executive for the Company or any such subsidiary or affiliate shall be the sole property of the Company or such subsidiary or affiliate, as the case may be, and Executive hereby waives any right or interest that he may otherwise have in respect thereof. Upon the reasonable request of the Company, Executive shall execute, acknowledge and deliver any instrument or document reasonably necessary or appropriate to give effect to this Section 11 and, at the Company’s cost, do all other acts and things reasonably necessary to enable the Company or such subsidiary or affiliate, as the case may be, to exploit the same or to obtain patents or similar protection with respect thereto.

EXHIBIT B

FORM OF ASSIGNMENT

For valuable consideration, the receipt of which is hereby acknowledged, Michael F. Anthony hereby [sells], assigns and transfers to                              all of his right, title, benefit, privileges and interest in and to the                              (            ) shares of [common stock] [Class A/B Interests] of                     (the “Company”) standing in his name on the books of the Company as of the date hereof.

Dated                     , 2006

Michael F. Anthony

EX-31.1

Exhibit 31.1

Certification in the Form Provided by Rule 15d-14

of the Securities Exchange Act of 1934

I, Louis Mancini, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended July 1, 2006 of Brookstone, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2006

By:	/s/ Louis Mancini
	Louis Mancini
	President and Chief Executive Officer,
	Director
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

Certification in the Form Provided by Rule 15d-14

of the Securities Exchange Act of 1934

I, Philip W. Roizin, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended July 1, 2006 of Brookstone, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2006

By:	/s/ Philip W. Roizin
	Philip W. Roizin
	Executive Vice President, Finance and Administration, Treasurer, Secretary and
	Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION IN THE FORM PROVIDED BY

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Executive Officer of Brookstone, Inc. (the “Company”), does hereby certify that:

1) the Company’s Form 10-Q for the quarterly period ended July 1, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Form 10-Q for the quarterly period ended July 1, 2006 fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Louis Mancini

Louis Mancini

President and Chief Executive

Officer, Director

Dated: August 15, 2006

EX-32.2

EXHIBIT 32.2

CERTIFICATION IN THE FORM PROVIDED BY

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer of Brookstone, Inc. (the “Company”), does hereby certify that:

1) the Company’s Form 10-Q for the quarterly period ended July 1, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Form 10-Q for the quarterly period ended July 1, 2006 fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Philip W. Roizin

Philip W. Roizin

Executive Vice President, Finance and Administration,

Treasurer, Secretary and Chief Financial Officer

Dated: August 15, 2006

EX-99.1

Exhibit 99.1

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk is its interest rate risk. The Company does not engage in trading activities and its foreign currency risk and commodity price risk is immaterial.

The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. As part of the Company’s risk management policy, it tries to minimize interest rate risk whenever possible. During Fiscal 2004, the Company obtained a real estate mortgage loan to help finance its new headquarters facility. The financing obtained was an $8.0 million, 10-year maturity, variable-rate loan based on one-month LIBOR plus 1.00% (see Note 8 to the accompanying Consolidated Financial Statements for additional details). In order to minimize the risk of exposure related to variations in cash flows over the life of the financing, in August 2004, the Company entered into a $4.0 million, 10-year interest rate swap agreement under which the Company receives one-month LIBOR plus 1.00% and pays a 5.67% fixed rate. The swap modifies the Company’s interest rate exposure by effectively converting 50% of the real estate loan from a variable rate to a fixed rate in order to hedge against the possibility of rising interest rates during the term of the loan.

As of December 31, 2005 and January 29, 2005, the swap’s notional amount was $3,466,667 and $3,833,333, respectively (notional amount is reduced $33,333 each month). The fair value of the swap, as of December 31, 2005 and January 29, 2005 was $11,996 favorable and $106,000 unfavorable, respectively. (See Note 2 to the accompanying Consolidated Financial Statements for additional details).

The Company has performed a sensitivity analysis as of December 31, 2005, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% increase and a 10% decrease in the levels of interest rates across the entire yield curve, with all other variables held constant. The analysis covers the Company’s long-term debt and interest rate swap. The analysis uses actual maturities for the debt and interest rate swap. The interest rate swap is valued using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate curves. The discount rates used in the net present value calculations were based on the market interest rates in effect at December 31, 2005. The sensitivity analysis indicated that a hypothetical 10% increase in interest rates would result in an $80,000 gain in the fair value of the interest rate swap. This gain in fair value on the swap is offset by an equal amount increase in interest expense from the unhedged portion of the real estate loan. The opposite results occurred with a hypothetical 10% decrease in interest rates, which resulted in an $73,000 loss in the fair value of the interest rate swap. This loss in fair value on the swap is offset by an equal amount decrease in interest expense from the unhedged portion of the real estate loan. Through the use of the interest rate swap on the real estate loan, the Company has minimized its exposure to changes in interest rates from its existing real estate loan and interest rate swap.

While these are the Company’s best estimates of the impact of the specified interest rate scenarios, actual results could differ from those projected. The sensitivity analysis presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes of this magnitude are rarely instantaneous or parallel.

Counterparty risk relates to the loss the Company could incur if its swap counterparty defaulted on the interest rate swap. The Company entered into a master agreement with its counterparty that allows netting of swap positions in order to manage this risk.